Stagflation Redux

It may not seem as bad as in the 1970s. But that doesn’t mean it won’t be painful.

It’s like a bad ’70s flashback. Oil at $100 per barrel, and now stagflation. The unhappy coincidence of sluggish growth and rising inflation, stagflation is economic poison. (Read my colleague Robert Samuelson’s excellent primer on it) It is the opposite of the economic idyll of the last quarter century, an era of relatively low inflation and relatively rapid growth.

The stag? Gross domestic product rose at an annual rate of only 0.6 percent in the fourth quarter of 2007, and likely isn’t doing much better today. The flation? The Consumer Price Index rose 4.3 percent between January 2007 to January 2008.


The numbers seem positively buoyant compared to our last serious bout of stagflation in the late 1970s, when inflation rates spiked to double-digit levels and mortgage rates were in the high teens. Compared to the mountain of economic woe in the late Carter years, the economic woes of the late Bush years are a mole hill. But that doesn’t mean those fretting about stagflation are crying wolf. Here’s why.

In his smart new entry in the behavioral economics genre, Predictably Irrational, Dan Ariely writes about the importance of context: People routinely make business decisions and judgments by comparing them to recent events rather than the distant past. Your relative happiness with your salary and bonus doesn’t rest on comparing it with what you made 10 years ago; it rests on comparing it with what you made last year, and with what the people sitting next to you are making this year. Yes, consumers today aren’t being ravaged by inflation, high interest rates, and slow growth as they were in the late 1970s. But that’s of little solace. Consumers compare their purchasing power and job prospects today with their purchasing power and job prospects of a year ago, or a few months ago. And that’s why the sudden decline in growth late last year and the persistent rise in prices are a slap in the face. This case of stagflation may be mild by historical standards. But since we haven’t experienced it in decades, our coping mechanisms are weak. That’s why consumer confidence has fallen of a cliff in the last several months.

Newsweek