Advertising Disclosure

Featured Savings Rates

Popular Posts

Featured Accounts

Stagflation: Does the U.S. Have It Today?


The following is the third guest article from professor Jeff Wiltzius, an economics professor and a long-time friend of mine. As I mentioned in July when I published his first article, Prof. Wiltzius has graciously offered to write a few articles for to share his insights into the economy and the Fed.

Stagflation: Does the U.S. Have It Today? Will the U.S. Economy Soon Encounter Stagflation?

by Prof. Jeff Wiltzius

In recent posts to, it became clear that some people do not have a clear understanding of the term stagflation. Stagflation was coined to describe a stagnant economy with inflationary pressure. In short, inflation and unemployment are occurring in the economy at the same time. So does the U.S. have stagflation at this point in time? The economy certainly has unemployment, so it has half of the requirements of stagflation. But technically, based on the official core CPI inflation measurements of 1.4%, it does not have the other half of the requirements for stagflation. So technically, no, the U.S. economy is not experiencing stagflation.

Ironically, the official version of the economy does not reflect what most people in the U.S. are experiencing. Most Americans are dealing with some parts of inflation in their microeconomic circumstances. These people do not care about the official macroeconomic version that inflation is under control. The reason for the discrepancy is that the core inflation numbers leave out the volatile sectors of food and energy costs. The data is what statisticians would refer to a skewed, simply put; the data reflects the impact of a small group of households on the entire population.

The top quintile (20% - households earning over $130,000 a year) of household income earners consume roughly half of the goods and services produced. This group is not affected in the same way by the volatile food and energy costs (gas prices) as the rest of Americans. When the majority of Americans, the bottom 50% of household income earners see gas prices go from $2.00 a gallon to $3.00, to almost $4.00 a gallon in the last five years, they feel it at the pumps. When hamburger goes up almost 15% in two years (U.S. Bureau of Labor Statistics, July 16, 2013) middle income Americans believe, and rightly so, that inflation exists because the prices of the necessities that they buy have sky rocked much higher than the 1.4% inflation rate.

Lower income families feel it even more. The choices become even harder. Faced with the choice of buying needed medication, or food for your children, either choice may have dire consequences no matter which option is chosen. When gas prices take up the entire household transportation budget, required maintenance on the car may be foregone. Normally inexpensive foods, like chicken leg quarters that could have been bought for thirty-nine cents a pound a couple years age in Florida, now run seventy eight cents a pound at discount store prices: that is double! For low to middle income families when prices on staples that are a normal part of their budget double, that is not inflationary levels, that is hyperinflationary (very high rates of inflation) levels.

Transportation has never been considered volatile like the food and energy sectors, but some recent events have made parts of the transportation sector fluctuate. The transportation sector is more difficult to interpret statistically because it includes a broad spectrum of transportation expenses, like: train, airlines, auto insurance and many other costs of transportation. An automobile is still most household’s biggest expense in transportation and is another area that has become more costly for middle income families while remaining affordable for the top quintile. One reason is President Obama’s stimulus plan that included Cash for Clunkers (Car Allowance Rebate System). Economists question government policies because usually there are unintended consequences associated with of the policies that are implemented. The Cash for Clunkers Program is a great example of the law of unintended consequences.

Designed to lower pollution emissions and stimulate new car sales. Many environmental groups have questioned whether there were any positive environmental benefits to the Cash for Clunkers program. That is beyond this economist’s realm of expertise. For that information see a study by Li, Linn, and Spiller at Resources of the Future ( What can be measured from an economic standpoint are two things. First, did the Cash for Clunkers program work as economic stimulus? Second, what were the long term unintended consequences of the program? cost of car changes

Look at what happened to used car prices after the Cash for Clunkers program hit in 2009. The yellow line shows an increase in used car and truck prices of more than 25% in two years. The spike in 2005 was caused by Hurricane Katrina and there would be another spike caused by Hurricane Sandy in 2012 if this data went further. All of these increases have hurt the middle income Americans the hardest. The blue line shows that the top quintile, the people who can afford new cars have almost no effect from inflationary pressure. Studies have indicated that roughly half of the new cars that were sold would have been sold regardless of the program, but $3 billion worth of used cars being scrapped certainly affected the used car market. So the program had little impact in terms of economic stimulus, but it had a major impact in terms of inflationary pressure for buyers of used cars.

Then there is that other part of the Consumer Price Index that all Americans are subject to, health care costs. These costs are now over twenty percent of the U.S. economy and health care costs have been rising at more than twice the core inflation rate. The projections for the future are that health care costs will continue to rise at more than twice the inflation rate as the U.S. population becomes older, which increases the demand for health care. The demand for health care is very inelastic because it is a necessity, so patients don’t shop for a better price, don’t question costs because of insurance, and buy the procedures even if the price is high. So far efforts to curb costs in the U.S. have failed.

So does the U.S. economy have stagflation; definitely not. The statistics simply do not support that fact. But if you are a middle income American looking at double digit increases in food, energy, medical care, and transportation costs, then it definitely feels like inflation. If you are an unemployed American facing double digit increases in food, energy, medical care, and transportation costs, then you are definitely experiencing stagflation. So does stagflation exist in America? Unfortunately for some, the answer is yes.

The next important question: is stagflation coming? In this economists opinion stagflation in the near future (3-5 years) is a definite possibility. The “quantitative easing forever”, the Federal Reserve is continuing to put $80 billion dollars a month into the monetary system, could be the primary cause of future stagflation. Virtually all economist agree that the primary cause of inflation is “printing” (the FED does not physically print money, the majority of the money supply is on electronic balance sheets) too much money. It is also this economist’s position that the primary problem in the U.S. economy is fiscal policy, out of control government spending, not monetary policy. If fiscal policy is the problem, then monetary policy changes cannot solve the problem. The current monetary policy can, in fact, cause the problem to become worse in the future. Unfortunately, with gridlock on Capitol Hill continuing with the current budget talks, there seems to be no relief in sight for the American people.

Related Posts

51hh   |     |   Comment #1
"It is also this economist’s position that the primary problem in the U.S. economy is fiscal policy, out of control government spending, not monetary policy. If fiscal policy is the problem, then monetary policy changes cannot solve the problem. The current monetary policy can, in fact, cause the problem to become worse in the future. Unfortunately, with gridlock on Capitol Hill continuing with the current budget talks, there seems to be no relief in sight for the American people."

I do not have much knowledge in Economics; but I know good stuff when I read one.  The observation above is so true.  My question is why these really perceptive subject matter experts (SMEs suhc as the author here) aren't in office and do something contributory to our country and our people.  Or that our country gets so political that there is no room for such SMEs any more?
51hh   |     |   Comment #2
Correction: "SMEs such as ...".
Scottj   |     |   Comment #3
I have argued with people for years on different finance forums about my desire to be in mostly CDs and very little in stocks, they would tell me with inflation I'm actually losing money and I have never agreed with that. I have always said inflation effects people differently and they would say I'm wrong, this article pretty much states what I have always felt. I make more than enough that a hike in many of those items like food and energy are no big deal, so bring on inflation and those higher CDs we get with them, I know i was doing much better when we had higher inflation
QED   |     |   Comment #4
It's important for posters here not to be welcoming of inflation and the resultant higher interest rates on CDs.  For many of us, if CD interest rates return to historic norms, we will be eaten alive by taxes.  The taxation will not be limited simply to Federal Income Tax, though that will be bad enough I assure you.  But today there are also all sorts of other special taxes for "high income" folks.  And it's becoming worse.

I've always enjoyed a more or less "normal" level of income;  middle class stuff, enough to live fine but nothing fancy at all.  Then, several years ago, I "struck it rich" for just one year.  Natural gas was discovered on my property and I leased my land for development of that resource.  This resulted in my receiving what's called a "bonus payment" which was huge, a payment I'm sure would be the envy of many.  But that payment was only just for one year, with things since having returned (pretty much) to normal.

When I did my taxes for that one "blowout" year I got a real education.  I was amazed to be paying taxes I'd never even realized existed.  And they kicked in at much lower levels that I'd ever supposed or believed possible.  Wiser now, and with my nestegg in CDs, I realize that if interest rates "skyrocket" to, say, 5%, I'm going to be right back paying some of those same taxes!!!

For savers sitting on nesteggs, the best scenario is deflation.  With defaltion our savings grow in value without generating much taxable interest.  This is probably just one of several reasons the government, and Bernanke in particular, resist deflation so strenuously.      
Anonymous   |     |   Comment #5
Fiscal policy is a broad term used to refer to the tax and spending policies of the Federal government  and all fiscal policy decisions are determined by the Congress and the Administration. However,  I disagree with Professor Wiltzuis belief that monetary poicy cannot impact fiscal policy problems. The Federal Reserve policy website states that "Monetary policy refers to actions of the central bank to acheive macroeconomic policy objectives such as price stability, full employment and stable economic growth".  It also states that "Congress established maximum employment and price stability as the macroeconomic objectives of the Federal Reserve". 

Congress established FED objectives to be "maximum employment"  and "price stability" because monetary policy can impact problems emanating from fiscal policy. Is it always sucessful? No. But you cannot tell me that past and present efforts of the FED are not counteracting a measure of damage caused by Bush era tax cuts, spending on unnecessary wars, House of Representatives bad behavior toward creating, respecting and implementing reasonable fiscal policy decisions, etc.

Finally, "Cash For Clunkers" was not a failure. The official Department of Transportation report to Congress on the program found that : 677,842 vehicles were turned in;$2,85 billion was paid out in rebates; miles per gallon average increased from 15.7 to 24.9; $2.8 billion in fuel savings were acheived; and $3,125 billion in incremental vehicle sales occurred(sales that would not have happened without the program), which added directly to our country's GDP ( Gross Domestic Product).

Experts say that when you combined the fuel savings and GDP benefit, the total benefit to American taxpayers was roughly 6 billion dollars(the program cost the Goverment roughly 3 billion dollars to operate). Oh boy, I wish all Government programs could fail like this!! 
scottj   |     |   Comment #6
One of the big reasons I retired was to avoid paying taxes, like the new unearned income tax that will be used to fund Obamacare. Between State and Fed I paid about 6% in taxes last year
Anonymous   |     |   Comment #7
With all due respect to Prof. Wiltzius, he has it backwards regarding government spending during periods of economic weakness.  For an alternative view read Prof. Krugman at
Maecl   |     |   Comment #8
Krugman is the last person I would want followed.
QED   |     |   Comment #9
Agreed.  Krugman is a perfect fool.  His insane rantings are read only by fools.
Anonymous   |     |   Comment #10
Prof. Krugman argues for Keynesian, demand side economics.  His opponents advocate trickle-down, supply side economics.  Supply side has been US policy for the past 30 years (including under Obama!), leading to undesirable outcomes for the little guy.  This suggests this little guy is not a fool and that Prof. Krugman's alternative approach is not insane rantings.
Maecl   |     |   Comment #11
#10:  If you want to follow someone who makes economic sense look to Thomas Sowell.

Anonymous   |     |   Comment #12
With all due respect, Thomas Sowell is another advocate of Milton Friedman supply side economics.  It wouldn't seem this approach makes much economic sense given the struggles the little guy has faced under supply side US policy over the past 30 years.
Maecl   |     |   Comment #13
#12:  Sowell may not believe in Trickel Down as I think I remember him saying.  He also doesn't think our money belongs to the government and they decide how much we can keep.  Our debt is almost 17 trillion and growing. Krugman wants more government spending.  Really! How's that working?
Wanderer   |     |   Comment #14
Although this is an interesting piece, it fails to consider the fact that the BLS is also gaming the consumer price index.

The problem is not merely that energy and food prices are left out of the index followed by the Federal Reserve. They are left in the alleged full CPI published by the government.

The real problem, which the learned Professor fails to consider, is that the government's methodology is inherently flawed. Instead of the fixed basket of goods, whose prices change from year to year, the BLS uses two subjective measures, "hedonic" adjustment, and "product substitution", to create whatever percentage of inflation suits the Treasury department and Federal Reserve, at any particular time.

Hedonic adjustment means that the price of goods are adjusted downward if the government statisticians decide that the product made in the current year is somehow subjectively "better" than the one made last year. For example, if Chevrolet priced its Impala at $26,000 in 2012, and, then, raises the price to $28,000 in 2013, the BLS can look to changes in the car to alter the price for statistical purposes. They will point out that this year's model, for an example (don't know if this is actually true of the Impala), might have backup sensors, or more comfortable seats. Or, maybe, it has a smoother running engine because of some new technology GM licensed from Toyota. The statisticians then conclude, on a subjective basis, that these "improvements" are worth 10% of the car price. So, they reduce $28,000 by $2,800 and insert the 2013 MSRP as $25,200, logging it as a "price decrease" item in the basket of goods, even though the true price has actually gone up.

Product substitution involves the claim that people will change what they consume as the price goes up. For example, let's say that, last year, filet mignon was in the basket of goods. But, filet mignon goes up by 50% in price. Accordingly, the government claims that people are no longer buying filet mignon. Instead, they up the percentage weight of hamburger meat in the basket of goods, claiming that, as a result of the rise in price, people no longer buy filet mignon. This removes the big price rise, and substitutes a cheaper good into the basket, without adjusting for the fact that it is a different item. Thus, the final alleged "CPI" is made to fit whatever the administration wants it to be.

Obviously, with hedonics and product substitution in play, the reported CPI is subject to so much fraud that it has become a worthless indicator. The true inflation rate is not 1.4%. It is more like around 8%, even now, in the middle of what is probably the worst depression in the history of the United states. What will happen when we really do start to recover?  Expect 25-75% per year inflation, and watch as your dollars buy dramatically less. It won't quite be Zimbabwe on the Potomac, but people who have invested in 2% per year 5 year CDs can look forward to their investment's buying power declining to, perhaps, 1/4 to 1/3rd what it was prior to this inflationary depression, which started in 2008. That's why I buy gold, platinum, silver, agricultural lands, and other tangibles, and only use this site to find the best liquid money market and checking accounts for transactional fiat money. Cash is now trash. And cash equivalents, like CDs, bonds, etc. are also trash and should not be bought.
Anonymous   |     |   Comment #15
Admittedly CPI methodology is imperfect, but it has been consistently followed for decades under administrations of both political parties.  So changes over time are meaningful, and in slow economic times the percentages tend to be low.  That is why, as Prof Krugman points out, the hyperinflation some have called for just has not happened over the last 5 years.  Accordingly inflation hating investments like stocks and bonds continue to outperform and inflation loving assets like gold and commodities underperform.

The financial institution, product, and APY (Annual Percentage Yield) data displayed on this website is gathered from various sources and may not reflect all of the offers available in your region. Although we strive to provide the most accurate data possible, we cannot guarantee its accuracy. The content displayed is for general information purposes only; always verify account details and availability with the financial institution before opening an account. Contact to report inaccurate info or to request offers be included in this website. We are not affiliated with the financial institutions included in this website.