I have been afraid of stagflation since late 2006. Initially, I based it solely on feelings and gut instinct. However, since I am an academic I like to verify such feelings and I therefore tried to come up with some more objective tools that I could use to guide me in my investment decisions. My golden rule is: never base any investment decision solely on either models or feelings! If you have followed this blog, you remember results spitted out from this research. Based on these findings + my gut feelings I concluded that the risk of stagflation was large enough to write about on my blog (see earlier entries with this title).
OK, I admit that few people talk about stagflation right now [even I see stag-deflation as the most likely near-term outcome, particularly in some southern Euro-countries]. I also admit that my “objective research tool used since August 2006” now clearly dismisses the likelihood of stagflation within the near future (see the figure with the clear easing in the threat of stagflation) ==> the only thing that remains now is the gut feeling. It is still there !!!!
To my defense I must also add that 2008 in many ways looked like a global-stagflation-year though. Look at the numbers from OECD:
GDP growth 2008 Inflation 2008
USA..........1.4% USA............4.3%
Euro area............1.0% Euro area.............3.4%
Great Britain ............ 0.8% Great Britain ........... 4.3%
Japan ............ 0.5% Japan ............. 1.4%
Average ............ 0.9% Average............ 3.3%
Compare this to 2007 when I made my predictions.
GDP growth 2007 Inflation 2007
USA ........... 2.0% USA ........... 2.9%
Euro area ........... 2.6% Euro area ........... 2.1%
Great Britain ........... 3.0% Great Britain ........... 2.9%
Japan ........... 2.1% Japan ............ 0.1%
Average ........... 2.4% Average ............ 2.0%
I therefore conclude with the following two points:
1) I do not think I was totally wrong. Personally, I think 0.9% average growth and 3.3% average inflation in the big economies is kind of stagflation, at least the light version I have talked about earlier!!! Also, remember that when I started predicting stagflation back in 2006/2007 there was not much evidence in the official figures of the rather odd combination of low growth and high inflation. The music was still playing and everyone was dancing merrily!
2) I think it is too early to celebrate that the fight against stagflation is won. With all the money pumped in to the system by central banks, together with the drastic interest rate cuts across the globe, plus the dire outlook for growth globally I think the “experts” close to one-sided focus on deflation is erronous! It may very well cause stagflation (and not only the light version) further down the road.