No stagflation lite?
I have certainly talked a lot recently about the slowing US economy. In doing so I have, with some reservations, adopted the views of Nouriel Roubini. I don't like his over dramatising but I think he is making some good points at the moment especially how the world cannot decouple from a US slowdown be it as catastrophic as he predicts or not (Dave Altig is much more balanced here) Another of his arguments which I have pondered is the idea of stagflation lite which hinges on what Roubini so pictoresque has termed the three ugly bears ...
1. The US house market slump.
2. Rising oil prices ...
3. ... and rising core and headline inflation which forces the Fed to raise rates to curb the rising prices thus exacerbating the already progressing recession.
It does not take much of an Econ 101 student to see that if all these factors above hold true the way they have been narrated by Roubini recently then it is, pure and simply, stagflation or perhaps stagflation lite as I believe is the correct term used by Nouriel. In terms of 1 I have given my view here and it do seems as if the US consumer might very well pull the brakes in the near future which at least will help ameliorate the CA deficit but by all means let us not venture afar here. Then we have 2 and 3 and I think it is difficult to see just how much of the rising oil prices which are spilling over into core inflation. And this is exactly what this entry is about ... are we really as vulnerable to an oil supply shock as we fear?
Ian McFarlane, the governor of the Federal Reserve Bank of Australia argues that rising oil prices do not matter as much as they did before in terms of serious supply shock effects.
'Ian Macfarlane, whose 10-year tenure makes him one of the world’s longest serving central bank chiefs, said in an interview with the Financial Times that he expected inflation to remain under control even if oil rose above its recent peak of nearly $80 a barrel.
“There is of course a lot of anxiety about oil and a lot of attention given to the issue worldwide. But what I find most relevant is that we have been able to absorb the increase in oil prices reasonably well, in a way nobody would have predicted two or three years ago.”
“We have got from $20 to $77, so if we were to go to $90, and people are saying that then all hell is going to break loose, I really doubt it,” said Mr Macfarlane, who steps down next month.'
He is obviosly talking from an Australian perspective but still it makes me wonder here. I mean, certainly the oil prices are beginning to take its toll but can they be decisive in tilting the US economy into a severe and apocalyptic recession some are talking about? A lot of this also depends on how the Fed acts to either stay on its path following the idea of central banks' adversity to reversal of whether in fact it will go out on a limp on this one and shift course? On that note I also remember a thougtful column a while ago by Bloomberg's Caroline Baum about the risk of stagflation.
'Today the economy is much more efficient, using less oil to achieve the same result. At the same time, globalization and the competition it fosters have put pressure on domestic producers to respond quickly or lose market share.'
Only time will and can tell I guess ...