'STAGFLATION' AND 'MISERY INDEX' MAKE COMEBACK

Stagflation, the worst of both worlds (anemic economic growth and high inflation) brings back less than fond memories of the 1970's, along with the misery index, which is calculated adding the inflation rate to the unemployment rate. Until the 1960's, Keynesian economists had thought that those two economic events couldn't happen at the same time.

Today's surprising inflation announcement indicates that we've actually been going through this dual poison. The Producer Price Index (PPI) (wholesale prices) shot up 1.8% in November alone, more than double the consensus expected increase of 0.8%. The PPI is up 2.4% compared with a year ago, and is up at an astonishing 8.3% annual rate in the past six months.

This is quite shocking since most economists, including those controlling our nation's monetary policy, have believed that deflation (declining) prices were the biggest risk. Rising prices, they believed, wouldn't return until the economy got much stronger and unemployment declined significantly. Their thinking has been that the economy is so weak that prices couldn't possibly go up.

Last month, consumer goods prices increased 2.3% and are up at an 11.2% annual rate in the past six months. Intermediate goods prices increased 1.4% in November and are up at a 9.3% annual rate in the past six months. Crude oil prices went up by 5.7% in November, which equates to 29.6% annual rate in the past six months.

Embarrassingly, this comes almost simultaneously with the pronouncement by Federal Reserve Chairman, Ben Bernanke, that the high unemployment, coupled with the high level of unused manufacturing capacity will keep inflation low. Poor Mr. Bernanke. He can't seem to get anything right.

The Federal Reserve is expected to keep interest rates at near zero, holding off increasing interest rates until they see sustained decreases in unemployment. As usual, the wizards at the Federal Reserve have it wrong (see Fed Chairman Ben Bernanke's history of bad calls, in his own words, HERE). Never mind that Feds' "easy money" policy of keeping interest rates near zero percent was one of the, if not the, main contributers in causing to the housing bubble.

Senator Jim Bunning (R-KY) gave Bernanke an old-fashioned tongue-lashing (along with his predecessor, Alan Greenspan) on the Senate Floor during Bernanke's Senate Confirmation Hearings. Among the gems in Bunning's statement was (my bold):

Chairman Greenspan’s attitude toward regulating banks was much like his attitude toward consumer protection. Instead of close supervision of the biggest and most dangerous banks, he ignored the growing balance sheets and increasing risk. You did no better. In fact, under your watch every one of the major banks failed or would have failed if you did not bail them out.

We haven't heard much about stagflation or the misery index in recent years, except in reference to Jimmy Carter years. It's no wonder why so many are making the comparison to our current president.

SEE MY JUNE 30, 2009 ARTICLE: HERE COMES STAGFLATION

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