by Anne Sanders

Created on: March 15, 2010   Last Updated: March 16, 2010

Stagflation is when inflation and economic stagnation occur simultaneously. For those who remember the bell bottoms of the 1970s, stagflation is another bellwether of the long hair and wide leg decade which had two periods of it from 1973-75 and 1979-1982. More stagflation occurred in the early 1980s and 1990s but not at the double digit level of the 1970s.

Some economists have mentioned stagflation as a possibility in our current recession, but price increases have not occurred at exceedingly high rates yet. The reality of stagflation is that prices increase at the same time that the economy and job growth slow. Thus, people have to pay more for everything while enduring wage cuts and job loss.

However, economists are beginning to forecast possible stagflation now with the Department of Labor reporting a 2.6 to 3.3 percent consumer price index increase from January 2009 to 2010, significantly above the Federal Reserve's goal of one to two percent consumer growth.

More significantly, the motor fuel consumer price index is up 50 percent since last January. Many economists associate oil shortages and oil price increases with the stagflation of the 1970s, but some economists point to a widening of the availability of money in economic markets as a more important precursor.

In any case, the specter of inflation is a burr in the side of Federal Reserve Chairman Ben Bernanke. The Federal Reserve has been lowering loan rates in an effort to enliven the economy after the housing and credit crises. Most economists expect the Fed to cut interest rates again in March, its sixth reduction since September. 

When Bernanke accepted the position as Federal Reserve Chairman in February 2010, he had this to say about the economy and the Federal Reserve.

“At the same time, this institution, like our country, faces enormous challenges, challenges that will demand continued commitment and professionalism from staff members in every division. On the economic front, the resumption of growth in the nation's output of goods and services is encouraging. But far too many people remain unemployed, foreclosures continue at record rates, and bank credit continues to contract.”

For the last few years, the Federal Reserve has been doing everything in its power, as well as trying new ways, to get banks lending and cash flowing in America-pushing down short and long term interest rates, providing loans to banks, supporting auto loans, credit cards, student loans, loans guaranteed

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