Best of the Week
Most Popular
1.UK Housing Market Affordability, House Prices Momentum and Trend Forecast - Nadeem_Walayat
2.Gold and Silver Sector Big Green Light and Low Risk Entry Setup... - Clive_Maund
3.UK Regional House Prices, Cheapest and Most Expensive Property Markets - Nadeem_Walayat
4.US Dollar, CRB, Oil, Gas, Copper and Gold - The Chartology of Deflation - Rambus_Chartology
5.Silver Price, COT, US Dollar Updates and More - Dan_Norcini
6.Will Gold Price Drop Below $1000 Soon? - Brad_Gudgeon
7.UK Regional House Prices Analysis - Video - Nadeem_Walayat
8.Crude Oil Swinging For The Fences - A 20 to 1 Option Play - Bob_Kirtley
9.Fed’s Tarullo: U.S. Interest Rates Liftoff Should Wait for Signs of Inflation - Bloomberg
10.UK Immigration Crisis Hits New Extreme of 336k Net Migration, up 32% on 2014 - Nadeem_Walayat
Last 5 days
U.S. Dollar Remains the reserve currency of the world for a good reason - 1st Dec 15
Why We Won’t See Gold $5,000 - 1st Dec 15
Globalist Lockdown is here to Stay - 1st Dec 15
Bank Regulations Continue To Hinder The U.S. Economic Recovery - 1st Dec 15
Thanksgiving Amid the Terror Threats - 1st Dec 15
Collapsing Global Economic Trade - 1st Dec 15
Gold Demand in China Heading For Record and Reserves - 1st Dec 15
Stock Market Mixed Expectations Ahead Of December, New Economic Data Releases - 30th Nov 15
The First Prophet - The Day God First Spoke to Man - Video - 30th Nov 15
America's Rendezvous With Destiny - The Fourth Turning - 30th Nov 15
Stock Market Consolidation Week - 29th Nov 15
A Black Friday for Gold Prices - 29th Nov 15
Politicians Driving The World Towards War - Fourth Turning - 29th Nov 15
Stock Market Down Monday, Gold Price Bottoming? - 29th Nov 15
Turkey Downs Russian Jet to Draw NATO and US Deeper into Syrian Quagmire - 28th Nov 15
Stock Market Quiet Week as Primary 5 Continues - 28th Nov 15
Black Friday, Weekend for Europe's Migrants - 28th Nov 15
HUI and Gold - Who's Leading Whom? - 28th Nov 15
Gold And Silver - No Ending Action, But End May Be Near - 28th Nov 15
Social and Cultural Distress Dividing The Nation - Fourth Turning - 28th Nov 15
Sheffield Houses Prices 2015, Best Estate Agents As Rated by Buyers and Sellers - 28th Nov 15
Stock Market Top Valuations, at a Critical Juncture - 27th Nov 15
The Top Shopping Opportunity on Black Friday - 27th Nov 15
Economics Is About Scarcity, Property, and Relationships - 27th Nov 15
UK Immigration Crisis Hits New Extreme of 336k Net Migration, up 32% on 2014 - 27th Nov 15
Vauxhall Zafira B Fire Danger Recall - What to Do Video - 26th Nov 15
Triggers In US Dollar Collapse - 26th Nov 15
Apple Stock is a 10-Year Short - Bear Market Environment - 26th Nov 15
U.S. Federal Reserve Rate Hike - 26th Nov 15
George Osborne's War on Buy to Let Sector Trending Towards Doomsday - 26th Nov 15
Will Turkey Drag NATO into War With Russia in Syria? - 25th Nov 15
George Osborne’s Autumn Statement and Spending Review Full Text - 25th Nov 15
Will Fresh QE From ECB Boost Gold? - 25th Nov 15
Sheffield, Yorkshire and Humberside House Prices Forecast 2016-2018 - 25th Nov 15

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

Reasons to Get Excited About Japanese Stocks

Here Comes Stagflation!

Economics / Stagflation Apr 29, 2011 - 08:41 AM GMT

By: Sy_Harding


Best Financial Markets Analysis ArticleIt’s official. The U.S. economic recovery is stumbling again, as indicated by Thursday’s report that GDP growth plunged to only 1.8% in the 1st quarter (from 3.1% growth in the previous quarter). And spiking oil, food, and other commodity prices have inflation on the rise.

Don’t lose sight of how we got here.

Exactly a year ago the recovery from ‘The Great Recession’ of 2007 – 2009 also stalled significantly as the government’s stimulus efforts, including rebates to homebuyers and cash-for-clunkers programs, expired. Economic reports from the housing industry, auto sales, and consumer spending were the leading indicators that the recovery had stalled, which was then confirmed when the 2nd quarter GDP report was released and showed economic growth had slowed from 3.7% in the 1st quarter to only 1.7% in the 2nd quarter.

At that point, the Federal Reserve seemed to panic, concerned the economy might be dropping back into a double dip recession. It began promising another round of stimulus, and then followed through by flooding the financial system with another dose of easy money via its current QE2 program.

That did the trick. The economy (and stock market) began to recover more strongly again. By the 3rd quarter of last year GDP was growing at a 2.6% rate, and then at a 3.1% rate in the 4th quarter. That was still well below the 5.0% growth of the 4th quarter of 2009, but promising.

However, over the past few months indications have been that the economy is stumbling again, and that it is due to the return of a number of the same issues that dampened growth last spring - along with a few new worries.

The early signs were again the return of dismal reports from the housing industry and consumer spending in January and February, accompanied by another inflationary leg up in oil, gasoline, and food prices.

And, as happened last year, those early signs have now been confirmed by Thursday’s report that GDP growth plunged to just 1.8% in the 1st quarter of this year, from 3.1% in the 4th quarter of last year.

It shouldn’t have been a surprise. Economists have been in a frantic race over recent weeks to revise their forecasts for 1st quarter growth downward. At the beginning of the quarter the forecasts were for 4% GDP growth for the quarter. Over the last two months the consensus forecasts dropped to 3.5%, then 3.0%, 2.5%, and last week to an average of 2.0%.

As noted , the actual number came in even lower, at just 1.8%.

With the negative economic reports, and rapid downward revisions of U.S. GDP forecasts by economists nationwide, and even globally, the first question is why did the Federal Reserve apparently not see the economy slowing?

In its statement after its FOMC meeting in March the Fed said, “The economic recovery is on firmer footing, and overall conditions in the labor market appear to be improving gradually.”

In its statement this week, after its April FOMC meeting, it said, “The economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually.”

The Fed’s statements this week regarding inflation indicate it is also behind the curve in that regard as well.

Last spring’s economic slowdown was exacerbated by the spike-up in the price of oil from $72 a barrel in February to almost $90 at the end of April (a high not seen again for 7 months), which was taking spending money out of consumers’ pockets. And central banks around the world began raising interest rates to fight back at the food and energy inflation they were seeing coming at them.

But the U.S. Fed said it saw no inflationary problems.

And in its statement after its April FOMC meeting this week, even as oil prices have spiked from $84 a barrel in February to $112 a barrel, food prices have risen further, companies have begun passing their higher costs along to consumers, and central banks around the world have been aggressively raising interest rates even higher to fight back at worsening inflation in their countries, the Fed said, “Inflation has picked up in recent months, but longer-term inflation expectations have remained stable, and measures of underlying inflation are still subdued.”

As it did a year ago, gold, the historic hedge against inflation, spiked up in reaction to the statement, this time jumping a big $24 an ounce, apparently believing the Fed is even further behind the curve on inflation.

Regardless of what the Fed says, the reality is that, as the GDP report clearly reveals, economic growth has stalled again, even while the Fed’s QE2 stimulus program is still in full effect (but will expire in June).

And if gold and global central banks are to be believed, an inflationary spiral has been underway for more than a year.

It does look like the Fed is getting itself into a stickier mess all the time, that if nothing is done the economy seems headed into that 1970’s double-whammy nightmare of stagflation, a stagnant economy with rising inflation.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website, and the free daily market blog,

© 2011 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2015 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History