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'Mini-Stagflation' to Present Big Headache for Bernanke

Federal Reserve Bank Chairman Ben Bernanke
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Federal Reserve Bank Chairman Ben Bernanke

Federal Reserve Chairman Ben Bernanke used the word “inflation” exactly seven times in this Jackson Hole speech Friday.

What he didn’t mention once was inflation’s ugly cousin and its baggage of not only rising prices but also higher unemployment.

The prospect of stagflation, indeed, is raising a growing amount of hackles on Wall Street these days on worries that the jobless picture isn’t getting any better and the cost of living—the primary effect of inflation—is rising.

Core inflation , mainly a measure of price increases not including food and transportation, gained 2.2 percent annualized in the second quarter, according to Friday’s gross domestic product breakdown.

The most recent Consumer Price Index shows a 3.6 percent overall gain when including the volatile costs of items at the grocery store and gas pump.

These are not overly alarming numbers from a Fed perspective, but they do indicate inflationary pressures beyond the 2 percent level the central bank tries to achieve as part of its dual mandate to maintain strong employment levels while controlling prices.

And they are partly attributable to what Bernanke has famously referred to as “transitory” items such as a jump in vehicle prices and rising commodities.

“But other factors, most notably rising rents, should continue to exert upward pressure on core inflation,” Michelle Meyer, economist at Bank of America Merrill Lynch, said in a research note. “This shows ‘mini’ stagflation, which puts the Federal Reserve in a challenging position.”

The “mini” part is that the pressures on prices are not severe at least inasmuch as the government is concerned.

The “stag” part comes because unemployment also is in play. The dual pressures create what is known as “stagflation.”

Several economists recently have opined that when the Labor Department releases the monthly nonfarm jobs report for August next Friday, the number could well show that the economy lost jobs during the month, the first time that would happen in a year and a half.

This presents an unattractive specter.

The point Meyer raised about rising rents is critical to the situation, in that the monthly CPI number has remained as relatively tame as it has because about 40 percent of the index comes from rents. Those costs have stayed low as the housing crisis has unfolded but are now indicating a rise.

Owners’ equivalent rent was up 0.3 percent in July and 0.2 percent in June, foretelling a turnaround that will make it harder for government figures to obscure.

In his speech Friday, Bernanke dismissed inflationary pressures that some dissenters at the Fed have cited in their reluctance to green-light any additional quantitative easing measures.

“With commodity prices and other import prices moderating and with longer-term inflation expectations remaining stable, we expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate,” he said.

However, the drumbeat over inflation and its new relative, “Mini-Stagflation,” will be hard to ignore both for Bernanke and his counterparts at the European Central Bank, who are dealing with even more serious inflation and are stuck between a stumbling economy and inflationary pressures.

“Their deliberate debasement of their currencies has led to a hallowing out of savings, productive investment and the middle class—leading to an exacerbated and prolonged economic malaise,” Michael Pento, senior economist at Euro Pacific Capital and frequent Fed critic, wrote in a recent analysis. “Bernanke may not believe in stagflation but that doesn’t make it any less a reality.”

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