Transcripts

The Symptoms of Stagflation Surface

SUSIE GHARIB: Two key inflation reports got a lot of attention on Wall Street this week and raised concerns about the impact of higher prices on the U.S. economy. That has led some people to worry about the possibility of a troubling economic scenario called stagflation. Suzanne Pratt explains.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: For several weeks now, many on Wall Street have been talking about the nasty "S" word-- "S" as in "stagflation." Stagflation is the ugly combination of high inflation and high unemployment. Those are conditions that recall images from the 1970s of gasoline lines and urban blight. The last time the U.S. experienced stagflation was in the early 1980s, a time when the nation also experienced the worst recession since the great depression.

JOHN LONSKI, CHIEF ECONOMIST, MOODY`S INVESTOR`S SERVICE: When we have stagflation, the U.S. economy is much more vulnerable to very severe recessions, because without a severe recession, the Federal Reserve is incapable of lowering inflation to a level that no longer distorts economic activity.

PRATT: To be sure, no one is suggesting that we`re currently experiencing stagflation. After all, the nation`s unemployment rate has been steady below 5 percent and GDP growth has been robust. Still, Wall Street is worried about the future, especially as inflation creeps higher every month, and the housing market continues to slow. Some economists are raising red flags about the potential for stagflation, albeit a mild version.

MARK VITNER, SR. ECONOMIST, WACHOVIA: I think that we might see a mini stagflation, where the unemployment rate goes from 4.6 to maybe 5.1 and inflation somehow levels off somewhere around 3 percent, which would be above the Fed`s target. But I don`t think that either of those conditions would persist for very long.

PRATT: Others however, are not at all concerned about the possibility of stagflation. While it`s true that core inflation has been rising, the rate of unemployment has not. In addition, they point out that the economic environment has changed significantly in the last few decades. In particular, they say the U.S. economy today is far less rigid than it was in the `70s and early `80s.

JAMES GLASSMAN, SR. U.S. ECONOMIST, JP MORGAN: They`ve been doing a lot of things in the last 30 years. We`ve been deregulating airlines, trucking, railroads, energy, banking. All of that transformation of the U.S. economy has made it much more flexible. At the same time, the world around is opening up. Countries all around us are wanting to go to work. It`s a very global economy.

PRATT: A global economy makes for heightened competition. As a result, it`s far more difficult for companies to pass on higher costs to the price of final goods. That`s one more reason economists say stagflation is unlikely to get a strong footing in today`s economy. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.