Like a lot of people, I've followed the debate between the inflation camp, and the deflation camp with more than a bit of interest, as which way that particular cookie crumbles will have a marked bearing, not only on the market, but the overall economy, in general.
Early on, (back when the bailouts were coming thick and fast), it seemed that the inflationistas were firmly in control, pressing the argument that, given the amount of money being thrown around, there was absolutely no way that inflation wasn't going to rear its ugly head. The only schism in that camp was between what seemed to be a majority, which warned of a "high rate of inflation," and a few Cassandras muttering darkly of "hyper-inflation," reminding all who would listen of the Weimar Republic, and much more recently, of a certain African nation.
The deflation crowd riposted with arguments that the amount of money was much less relevant than the velocity of money. As I struggled to compare the validity of both camps' arguments, and reconcile the respective theories with what appeared to be actually going on, about 8 months, or so, ago, I was suddenly struck by the thought there was a Door #3, marked stagflation.
Stagflation is relatively new word in the economists' vocabulary, having gained widespread usage in the 70s. According to the Investopedia dictionary, stagflation is defined by low/no growth, high unemployment, and rising prices. Does that scenario ring any bells? (Hint...check some recent financial news headlines...) Of course, I can already hear readers saying ... "Hey, wait a minute, prices aren't inflating ... if anything, they're going down. Isn't that why Ben, et al, want to keep providing money at low interest rates ... to keep deflation at bay?"
The reader would be correct ... as long as one is looking at "core inflation," which excludes volatile items like energy and food ... rather than "headline inflation." Back in the 70s, it was oil shocks that drove up costs all across the board, both directly to the consumer, in terms of how much it cost to fill the gas tank, or the heating oil tank, as well as to manufacturers, and distributors, in terms of energy inputs, either directly, or by virtue of the transport chain ... both for raw materials, as well as distribution of finished products.
Today, while comparatively high, the price of oil/energy has been relatively stabile. In fact, some oil traders/analysts are looking at the possibility of a rather marked decline in oil prices, as developed economies weaken. (Naturally, stuff like geopoltical risk is always a wild card in the oil price deck.)
The reason I titled this piece "Stealth Stagflation" is because of what is happening in the "other" volatile item excluded in the computation of core inflation....food. A person could never pick up a newspaper, listen to the radio, or watch TV (or spend time on-line), but is made aware of energy prices every time the gas tank is filled.
Unless one is a farmer, works in food mfg./processing, or the food/beverage industry, pricing is much less "transparent." It's certainly no secret that food companies have been putting more "air" in boxes, and less product, but its not as dramatic as seeing gas prices spiking by first $0.10, then $0.20, and then $0.30 per gallon, in the matter of a week, or two.
A couple of days ago, I was listening to a commodity trader on the radio, discussing the rapid rise in grain prices. He mentioned the practice of reducing the number of slices in a loaf of bread, as one way of keeping a lid on costs, and then he also mentioned something that I'd not heard of previously. Prior to baking, bread dough is "aerated." By increasing the amount of air in the bread, costs can be reduced, just as a fast food restaurant can "water down" their soft drinks by cutting back on the amount of syrup that is dispensed with each drink.
Rather than facing inflation, or deflation, I'm increasingly concerned that we may be soon seeing the worst of both worlds.