Introduction to Stagflation
The American economy is currently experiencing a rare phenomenon known as stagflation. This occurs when there is a combination of stagnant economic growth and high inflation. Recent data has shown that the consumer price index (CPI) has increased by 0.4% in August, with a 2.9% annual increase. This is largely due to a steady advance in tariff-induced inflation, rising gasoline prices, and a strong demand for discretionary services.
Understanding the Data
The core prices, which exclude food and energy components, rose by 0.3% on the month and by 3.1% on the year. This suggests that the economy is not near falling into recession, despite a slower pace of hiring and wage growth. The demand for discretionary services remains strong, which is driving up consumer prices. The easing of real average hourly earnings to a 0.7% increase on a year-ago basis, down from 1.2% previously, is also a contributing factor to the emergence of stagflation.
Factors Contributing to Stagflation
Several factors are contributing to the current stagflation. These include a 5.9% monthly surge in airfare prices, a 1.9% increase in gasoline prices, and a 0.9% rise in transportation costs. Additionally, there has been a 0.5% advance in food and apparel prices. The large price increase of 2.7% for beef and veal, which translated to a 13.9% rise from a year ago, has also added to sour public sentiment on inflation.
Impact of Tariffs
The tariffs imposed on imported goods are also having a significant impact on the economy. The prices of fresh vegetables increased by 3% on the month, while the price of tomatoes climbed by 4.5% in August. These increases are directly attributable to import taxes. The energy sector has also been affected, with a 0.7% increase in energy prices due to a 1.7% rise in energy commodities and the strong advance in gasoline prices.
Service Sector Prices
The service sector has seen a significant increase in prices, with a 0.3% rise in service prices and a 0.4% increase in housing, shelter, and owner’s equivalent rent. The large jump in monthly transportation costs was driven by a 1% increase in used cars and trucks and a 0.3% increase in new vehicles. However, medical costs dropped by 0.2%, while recreation prices dropped by 0.1%, and education and communication prices were flat.
The Takeaway
The current economic situation is complex, with both positive and negative indicators. While the demand for discretionary services and upward price adjustments suggest an economy that is not near falling into recession, the rising food and energy costs are moving in the wrong direction. The Fed is expected to cut its policy rate on September 17, but it is rare that a rate-cutting cycle starts with fundamentally solid discretionary demand driving service sector inflation higher.
Conclusion
In conclusion, the American economy is experiencing a rare phenomenon of stagflation, with stagnant economic growth and high inflation. The demand for discretionary services, tariff-induced inflation, and rising gasoline prices are all contributing factors. While the Fed is expected to cut its policy rate, it is crucial to proceed cautiously and consider the potential impact of expansionary fiscal policies. The current economic situation is complex, and it is essential to carefully analyze the data to make informed decisions about the future of the economy.
