Fears of Stagflation Return As Price Increases Gain Pace; Fed Cuts Outlook For Economic Growth Amid Credit Crunch
The U.S. faces an unwelcome combination of looming recession and persistent inflation that is reviving angst about stagflation, a condition not seen since the 1970s.</br></br>Inflation is rising. Yesterday the Labor Department said consumer prices in the U.S. jumped 0.4% in January and are up 4.3% over the past 12 months, near a 16-year high. Even stripping out sharply rising food and energy costs, prices rose 0.3% in January, driven by education, medical care, clothing and hotels. They are up by 2.5% from the previous year, a 10-month high.</br></br>The same day brought a reminder of possible recession. The Federal Reserve disclosed that its policy makers lowered their forecast for economic growth this year to between 1.3% and 2%, half a percentage point below the level of their previous forecast, in October. They blamed a further slowdown on the slump in housing prices, tighter lending standards and higher oil prices. They warned the economy's performance could fall short of even that lowered outlook.</br></br>Stocks fell on the Labor Department's morning inflation report. But shares rallied after the afternoon release of the minutes of the Jan. 29-30 meeting of Fed policy makers and their latest forecast for the economy. That's because investors took the Fed's darker outlook on growth to mean that it intended to cut its short-term interest rate next month at its next scheduled meeting.</br></br>A simultaneous rise in unemployment and inflation poses a dilemma for Fed Chairman Ben Bernanke. When the Fed wants to fight unemployment, it lowers interest rates. When it wants to damp inflation, it raises them. It's impossible to do both at the same time.