Surging wholesale prices and declining production gripped the U.S. economy in January, government data showed Friday, prompting some analysts to raise concern about new inflationary pressures amid the slowdown.
To some, it appeared that stagflation, the scourge of the 1970s, might be returning in a milder form and threatening to prolong the slowdown. Stagflation occurred in the past when high inflation joined hands with slow growth and rising unemployment.
A 1.1 percent rise in producer prices last month, combined with the fourth straight monthly decline in industrial production, conjured up memories of this difficult era, even though today the jobless rate is much lower than it was 30 years ago and inflation is tamer.
Many analysts saw the January figures as an aberration and said that wholesale prices, affected by sharp rises in energy prices, would settle down soon.
“A one-month wonder,” economist Richard Berner of Morgan Stanley called the inflation report.
But not everyone was so sure.
Rising energy prices, higher health-care costs, wage demands that continue to creep up, a wave of layoffs, rising unemployment and a dramatic economic slowdown all suggest to some economists that a milder version of stagflation could hang over the economy for a while, complicating the job of policymakers like the Federal Reserve.
This is not to mention America’s mighty dollar, which remains strong despite a record trade deficit. If the dollar should slide, said economist Barry Bosworth of the Brookings Institution, it could touch off strong inflationary pressures.
Bosworth said a key indicator for a return of mild stagflation would be steadily rising wages. “Very, very, very slowly, they are creeping up,” he said.
Paul Kasriel, senior economist at Northern Trust Co. in Chicago, also sees a return of stagflation, reflecting stronger wages and higher energy prices.
Usually slowdowns, such as the one that has hit the U.S. serve as a powerful brake on inflation as consumers retrench and curb wage demands. But people find it hard to cut back on energy usage or food, said economist Michael Drury of McVean Trading Co. of Memphis.
Drury said a “mini-stagflation” prevails. He cited higher health-care and wage costs in industries where workers feel more secure, such as airlines.
Reflecting the potential for malaise, an important measure of consumer sentiment fell to its lowest level in more than seven years, according to a report issued Friday.
The University of Michigan’s preliminary February consumer sentiment index slipped to 87.8, a level not seen since November 1993, down from 94.7 in January.
The expectations index, which measures attitudes about the months ahead, fell to 77.6 from 86.4 in January.
Also in January, the producer price index, measuring inflation at the wholesale level, surged by 1.1 percent, the highest since a 1.3 percent increase in September 1990. A record 11.3 percent jump in residential natural gas prices led the way.
Natural gas prices used to power electric utilities soared by a record 64.4 percent. Gasoline prices were up 1.6 percent and residential electricity prices increased 1.4 percent. Overall, energy costs jumped 3.8 percent. Food prices went up 0.8 percent.
The so-called core rate of inflation, which excludes food and energy, rose 0.7 percent, the most since December 1998. If it continued at that pace the rest of the year, which is not expected, it would translate into an inflationary explosion.
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Still, Don Hilber, senior economist for Wells Fargo Banks, said in a report that he expected a core rate of inflation of close to 3 percent likely will persist even as the Federal Reserve tries to stimulate the economy with lower interest rates.
Whether the January wholesale price number is a one-time blip or a sign of strengthening inflation may be clearer Wednesday, when the government reports on January consumer prices. This report would tend to show whether businesses have been able to pass on price increases to consumers.
Bosworth, who said the numbers appeared to overstate inflation, nevertheless said the figures “illustrate the potential dilemma for monetary policy. It was easier to cut interest rates when the economy was slumping and inflation was low. It’s hard to know what to do when you get a weakening economy and rising prices.”
Federal Reserve Board Chairman Alan Greenspan, reacting to signs of a dramatic slowdown, cut interest rates by 1 percentage point in January. A further reduction is expected in March.
The Fed chief earlier in the week cited “downside risks” to the economy over the next several months but said he expected the economy to be stronger by the end of the year.
Signs of the slowdown have been apparent in a number of indicators. The government reported industrial production, measuring output at the nation’s mines, factories and utilities, dropped for the fourth month in a row last month.
A third government report showed that new housing construction increased by a solid 5.3 percent last month to a seasonally adjusted annual rate of 1.65 million units. Housing has been one of the few areas of strength in the slowdown.
Kasriel, who sees a moderate form of stagflation prevailing, added that more inflation than expected could be generated by the Federal Reserve’s easier monetary policies and energy prices.
In the last 13 weeks, the central bank has been releasing money into the economy at a rate three times faster than a year ago, a sign it is going all out to prevent a recession, he said.
“The Fed is going to be pumping up demand, but it’s not going to increase the supply of energy,” Kasriel said. “Prices of other goods and services will not fall. The economy is not going to be growing very much. That’s called stagflation.”