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Stagflation Lite

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Have to say it was interesting to see the 'S'-word [stagflation] travel across my TV screen this morning

Stagflation Lite, a Dose of 1970s Scourge, May Give Bernanke Nightmares

May 22 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke may be facing a central banker's nightmare this year: what Allen Sinai, president of Decision Economics Inc. in New York, terms ``a mild dose of stagflation.''

Surging oil and commodity prices, a falling dollar and mounting doubts about the Fed's willingness to keep price pressures in check are all increasing the risks that inflation will quicken. At the same time, the Fed's two-year credit- tightening campaign is beginning to bite; with the housing market sagging and consumer confidence wavering, the result may be slowing growth.

Call it stagflation lite. The toxic combination last seen in the 1970s is bad news for consumers, companies and investors. Consumers find themselves squeezed by rising prices and diminishing job prospects. Profits take a hit as companies face mounting costs and diminishing demand. Investors' portfolios shrink with a swooning stock market.

``The danger is the Fed loses its inflation-fighting credibility,'' says Bill Healey, senior vice president of interest rate products at GE Asset Management Inc. in Stamford, Connecticut.

Some investors wonder whether the Fed has let price pressures build by concentrating too much on core inflation, rather than focusing on overall numbers that include food and energy costs.

Note to ONS :huh:

``If you keep removing things that are rising in price, like energy, food, and now housing, pretty soon you will see no price increases,'' he says. ``This is a scary path to walk down.''
``This economic slowdown may be broader and deeper than we think,'' says Joe Carson, director of global economic research at AllianceBernstein Holding LP in New York, who foresees growth slowing to 2.4 percent this quarter.

If the scenario of sub-par growth and too-high inflation comes about, Bernanke and his colleagues will face unpalatable choices. Do they raise interest rates to squelch rising inflation and risk sending the economy into a tailspin? Or do they forgo increases in rates -- even cut them -- to cushion the declining economy and in the process run the danger of letting inflation accelerate?

Economic historians such as New York University professor Thomas Sargent say it was the Fed's mishandling of monetary policy, rather than the steep rise in oil prices, that was behind the economy's performance in the mid-to-late 1970s. That may be enough to keep Bernanke and his fellow Fed policy makers awake at night.

Phew - I was worried there - at least its only Stagflation-'Lite'

Edited by jp1

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  • 343 Brexit, House prices and Summer 2020

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      • down 5% +
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