Today’s Data Has "Stagflation" Written All Over It

by Florida's #1 Mortgage Planner on August 14, 2008

To fully understand what I mean you have to know the definition of stagflation, which is a period of slow ("stagnant") economic growth usually seen in increased unemployment and rise in general prices ("inflation").  Apply that definition to this morning’s two economic reports and I think it is clearly seen.

First, we had the Consumer Price Index (CPI) released, which showed the highest year over year rise in 17.5 years.  Recently, we saw that PCE (Personal Consumption Expenditures Index – the Fed’s favorite gauge on inflation) was the highest since the early 1980s, so it is not hard to see inflation here, even if brought on by oil and commodity prices.

Then, you look at the jobs front.  This morning we saw another worse than expected Initial Jobless Claims report, many feeling that the numbers show us to be in a recession.  Again, we just saw a Jobs Jamboree which highlighted a rising unemployment rate, so stagnation in our economy is presented as well.

Does this spell doom and gloom for the financial markets, the mortgage bond market, and higher mortgage rates?  Not necessarily, but reality is what reality is.  Whenever there is higher inflation, mortgage rates tend to rise.  On the other side, whenever there is slow economic growth, mortgage rates tend to drop. 

We can only look back to the timeframe when "stagflation became a term, the late 1970s and early 1980s.  Mortgage rates were in the teens back then, but I doubt they will get that high this time, but I wouldn’t expect them to be coming back down anytime soon either.

Leave a Comment