Is '70s-Style Stagflation Next Up for the U.S. Economy?

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Gail Fosler, chief economist of the Conference Board, came out with her stagflation call this morning. Oh, and the Fed is also going to resume raising rates, she added. Ugly stuff. The global research organization's index of leading economic indicators has turned downward of late, leading to Fosler's prediction of a slowing economy. But she also thinks inflation will remain stubbornly high. Slow growth plus inflation equals stagflation. Here's her two cents:

The challenge for both the Federal Reserve Board and the U.S. economy is that this period of subpar growth is likely to have little impact on inflation and short-term interest rates. … Rather than coming down, they are likely to remain high for an extended period or even go up … Core CPI is running at about 2.5 percent, which is on a par with the rate that preceded the 2001 recession, and appears to be moving up to the 3 percent inflation rates of the mid-1990s …. It is hard to believe that the Fed will not have to continue to raise the Fed funds rate in the face of these inflation pressures. Before the Fed can actually cut rates, an event or shock of a sufficient magnitude to reverse the currently entrenched optimism in commodity markets will have to occur.

Too bad Fosler didn't fire up her Bloomberg and check out what Richard Fisher, the hawkish governor of the Dallas Fed, had to say at a speech in London earlier today. In regard to interest rates, Fisher said he was "very comfortable with the policy of where we are today." Now, some traders took those remarks as a bad sign for the chances of a much-anticipated rate cut in early 2007, but they may have overdone it given Fisher's distaste for inflation. Also note that the just-released September survey from the National Federation of Independent Business found that fewer small-business owners are now planning to raise prices.

"A happy event for the Fed," says NFIB chief economist Bill Dunkelberg.

And as for worries about economic growth, economist Mike Englund of Action Economics directs gloomy types over to today's U.S. wholesale trade report, which "revealed a robust growth trajectory for both sales and inventories that has further reduced prospects for a meaningful slowdown in GDP growth in Q3, as some still fear." The "1 percent GDP" crowd should take notice.

One way to reality check all this stuff is by looking at the stock market. Growth proxies like Citigroup, Chicago Board of Trade, Federal Express, and Wal-Mart have all seen their stocks trend higher in recent weeks and months.