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Should You Worry About Stagflation? Threat Rears its head

Written by By Ben Baden US News Tuesday, 24 May 2011 23:00

Inflation hawks say if the United States continues its current path, stagflation could return

In November 2010 when the Federal Reserve launched its latest round of quantitative easing—known as QE2—it cited concerns that without more stimulus, the country could slip into a deflationary environment of falling prices. But after months of Fed bond buying, critics say the program is causing inflation, most notably in oil prices. Now, some experts are concerned that higher fuel and food prices, coupled with slower-than-expected growth in the United States, may cause a different type of economic phenomenon: stagflation.

Stagflation occurs when a slowdown in economic growth combines with a rise in inflation. The last time the United States experienced a serious bout of stagflation was in the 1970s, amid a similar oil-price shock, inflation in the low double-digits, and a depressed economy. Inflation hawks say if the United States continues its current path, stagflation could return.

[See 7 Problems That Could Derail the Global Recovery.]

"I think it's probably the biggest unspoken concern of those of us that consider ourselves cautious or bearish," says Jeffrey Sica, chief investment officer of Morristown, N.J.-based investment firm SICA Wealth Management. "Stagflation is a real possibility that's not discussed much."

Sica points to first-quarter GDP numbers, which showed the U.S. economy is growing at a sluggish rate of 1.8 percent. That's slower than the fourth quarter of 2010, when it grew at a more robust rate of 3.2 percent. Much of the slowdown in growth was attributed to higher food and oil prices.

[See Why the Federal Reserve Isn't Worried About Inflation Yet.]

In March, the Consumer Price Index (CPI), which measures the average change in prices of goods and services over time, rose 0.5 percent. Over the past year,

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