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Stagflation on the horizon

Dean Baker from the Center for Economic and Policy Research says that inflation doesn’t have to go very high for consumers to feel the crunch, since wages remain stagnant. Baker predicts a cocktail of negative market trends that will be harder on working families than the extreme stagflation of the late 70s. With housing prices falling, people’s primary equity is decreasing, while prices continue to rise and wages go nowhere. Baker also warns against increasing interest rates to beat back inflation, suggesting that it would only lead to more unemployment and lower wages.

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Story Transcript

MATTHEW PALEVSKY, JOURNALIST, TRNN (VOICEOVER): According to the Bureau of Labor Statistics, inflation has risen to about 4.5 percent, nearly double what it was two years ago. The largest single contributor has been the rise in energy prices, with oil hitting record highs almost every week. The Real News asked Dean Baker from the Center of Economic and Policy Research how rising inflation rates will affect working Americans.

DEAN BAKER, CENTER FOR ECONOMIC AND POLICY RESEARCH: Well, the wages aren’t keeping pace. I mean, that’s the key issue. You know, if our wages were all going up 10 percent, we still wouldn’t be happy that, you know, prices are going up 4.5 percent, but, you know, you could live with that. But in this case that’s not true. Wages are only going up at about 2.5 percent or a little bit more, so they’re falling well behind inflation. And then, on top of that, people are seeing a really big hit because for most people their major source of wealth is their house, and house prices are plummeting. So on the one hand, people’s wages aren’t keeping pace with inflation. Second, the house which they’d seen as a store of wealth, something they can go back and count on, the equity in their home, that’s disappearing or in many cases has disappeared for a lot of people. So this is really bad news at a really bad time, and, you know, in many ways it’s probably the worst financial period for most families since the Great Depression.

PALEVSKY: Are we seeing how rising prices affect the average American reflected in the official stats? Is it really higher for everyday Americans?

BAKER: Well, I mean, those are showing up in the data. I mean, we’re seeing, you know, a consumer price index showing year over year an increase of about 4.5 percent. Now, every individual person has a somewhat different rate of inflation, since, you know, maybe you get gas, I don’t get gas, but I get more meat. So our rate of inflation’s going to depend on what specific products we buy. There are some sort of technical issues that will make a difference in terms of how the inflation’s counted. For example, for most of us, when we think of health care cost, if we have to pay more for our insurance, if we have a larger copay ’cause maybe our employer requires us now to, you know, pay half or a third of our insurance premium, for us that’s a rise in our cost of living. Now, that won’t show up in the consumer price index, because they’re just asking how much does it cost for this or that medical procedure. So it’s not a perfect measure by any means, but I think the basic story is being picked up that, you know, if we go back a couple of years ago, inflation was, you know, 2, 2.5 percent, and now we’re looking at being over 4 percent. That’s not capturing everything, but it does pick up the increase.

PALEVSKY: And should Americans be looking towards the Fed to raise interest rates to try and beat back inflation?

BAKER: The Fed can beat back inflation, but it’s not a simple mechanism. What the Fed does is they raise interest rates, and that’s going to slow the economy, that’s going to throw people out of work. And then, when enough people lose their jobs, then we expect to see wage growth will slow. And then, with slower rates of wage increases, then firms will perhaps stop passing on prices. Now, that will slow inflation, but the way it slows inflation is by most people taking pay cuts. So I don’t think that’s what most people have in mind. So it’s a very crude mechanism for controlling inflation. There are times where you could say that may be appropriate, perhaps in the ’70s. I’d argue that. But there was at least an arguable case that wages were pushing inflation, so the remedy in that case, it arguably was, well, let’s stop having wage increases. But in this case, the problem with inflation is not wage growth; the problem is higher energy prices, higher food prices. The Fed really can’t do anything about that.

PALEVSKY: And are we going to see stagflation? Is that what this leads to?

BAKER: Well, I think we’re seeing something like that. Again, it won’t be ’70s stagflation, ’cause ’70s was this cycle where we had higher rates of inflation, which led to higher rates of wage growth, which led to higher rates of inflation, and then it was coupled with fairly slow overall economic growth. We’re not going to see that sort of spiral, but we are seeing higher inflation—that is going up—and the economy is going into a downturn now. I don’t think there’s any way around it. We are going to be seeing a recession with lost jobs in the private sector for six months in a row. It never happened except for the recession. So we are seeing both, you know, slow growth or probably, actually, a recession coupled with rising prices, rising inflation. So, you know, we could call that stagflation, but it’s not the same stagflation we had in the ’70s.

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Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee their complete accuracy.