What is stagflation?

February 27, 2008 12:03:06 AM PST
Economists are tossing around the term "stagflation" -- which is defined as persistent inflation combined with stagnant consumer demand and relatively high unemployment.

Shoppers at this San Francisco grocery store can attest -- everything seems to be going up.

"Anything. Milk's expensive, bread's ridiculous," said San Francisco resident John O'Neill.

In fact, the latest wholesale report said food costs jumped by 1.7-percent. That's the biggest monthly increase in three years.

Also hard hit -- energy prices. So much so, that an Oakland trucking company is barely getting by.

"We're just trying to survive right now and get through this tough spot because of the economy and fuel prices, it's really hurting us pretty bad," said AB Trucking president Bill Aboudi.

If this scenario continues, economists say the threat of so-called stagflation is very real.

The term was coined in the 1970s when economic growth stagnated, while prices went up.

"Current environment is similar in style to the late 70s and early 80s, in that inflation is high and rising and the economy is weak and slowing," said Deutsche Bank chief economist Joseph LaVorgna.

Economists say stagflation creates a vicious cycle -- people cut back on their spending while businesses slow down on hiring.

Despite that prospect, U.C. Berkeley economics professor Jim Wilcox says the Federal Reserve should stay focused -- and work on shoring up the ailing economy first by cutting interest rates.

"It really needs to put its primary attention right now where it has been for the last six months, and where I think it will be and really ought to be for the next six months, and that is making sure that these financial markets operate more smoothly, and our economy has the kind of strong job and output performance it really can have," said U.C. Berkeley economics professor Jim Wilcox, Ph.D.

Until then, shoppers will be dealing with rising prices as best they can.

"I'm going to have to give up bread for one thing. I am not going to eat as many sandwiches as I used to that's for sure," said O'Neill.