EYE ON
AMERICA Stagflation and recession risks
loom By Peter Morici
On
Wednesday, the US Labor Department reported that
the Consumer Price Index rose 0.2% in June, after
rising 0.4% in May.
Seasonally adjusted,
food prices were up 0.3% in June and 0.1% in May.
Energy prices fell 0.9% after rising 2.4% in May.
Energy and food prices are quite erratic
month-to-month, and US Federal Reserve
policymakers pay close attention to movements
in
the core indexes. The Fed is particularly
concerned about the pass-through of higher
petroleum prices into other sectors of the
economy.
Core producer prices - producer
prices less food and energy - rose 0.3% in June,
as they have for the past four months. Since June
2005, core consumer prices have risen 2.6%, and
the compound annual rate of change for the three
months ending in June was 3.6%.
Clearly,
inflation remains above Fed chairman Ben
Bernanke's target range of 1-2%. More
interest-rate hikes are likely. The question is,
what risks does that pose?
The outlook for
inflation is significantly colored by energy
prices.
Gasoline prices eased in June. The
average retail price of gasoline was US$2.92 a
gallon (77 cents a liter), down from $2.95 a
gallon (78 cents a liter) in May. However,
crude-oil and gasoline prices are moving up again,
and will add to inflation when the July figures
are tallied.
The crisis in Lebanon and
Israel has instigated unwarranted panic in oil and
stock markets. Spot prices for oil averaged about
$70 a barrel in June, and are now at about $75.
That change should add about 13 cents to the price
of a gallon of gasoline and no more than a
one-time, 0.3% bump to the Consumer Price Index.
Considering that gasoline prices were up
73 cents a gallon in June from a year earlier, a
10-20-cent increase could be absorbed without
throwing the economy into the abyss. Other
factors, in particular higher interest rates, a
flagging housing market, the overvalued dollar and
the trade deficit, pose much greater threats to
growth.
The Middle East crisis is not
likely to disrupt petroleum supplies, and prices
should recede once markets recognize this. Three
months from now, the crisis should have no
appreciable effect on core inflation.
If
the Federal Reserve does not overreact to the
recent surge in oil prices, the Middle East crisis
poses no appreciable threat to growth or price
stability. It is really up to Bernanke to
recognize that the US gets no oil from Lebanon,
Israel or Syria, and to respond in a fashion that
inspires market confidence.
Recent retail
sales and jobs data indicate the US economy is
slowing, as do recent reports from the automobile,
housing and construction sectors. International
oil and commodities markets remain the critical
sources of inflation, but those are beyond the
influence of US interest-rate policy. If the
Federal Reserve acts too vigorously to contain
inflation, it will derail the economic expansion
and drive up unemployment.
Unfortunately,
the Federal Reserve under Bernanke appears to be
moving toward a stricter and more doctrinaire
monetary-policy stance. If the hawks have their
way, the soft landing for the economy anticipated
by forecasters and the Federal Reserve could turn
into a recession.
By itself, the Middle
East crisis does not seriously threaten the US
economy. However, the danger that the Federal
Reserve will mismanage monetary policy in the wake
of the crisis significantly increases the risks of
stagflation and recession.
Peter
Morici is a professor at the University of
Maryland School of Business and former chief
economist at the US International Trade
Commission.
