Inflation and cellulite, they’re both scary!

A serious fall in the U.S. economy would be bad news for the global economy, and, yes, that includes the Commonwealth. Yours truly warned you a few weeks ago that Uncle Sam’s fortunes were due for a change for the worse. But even my crystal ball was surprised at the magnitude of the latest bad news.

By which I mean: Inflation.

Yes…it’s baaaaack.

January’s Consumer Price Index jumped 0.6 percent. If we just carry forward that amount for a year (a simplified approach, but what the heck) we come up with an annualized rate of 7.4 percent.

I can see some of my sharp eyed readers reaching for their calculators. Hey, Ed, 0.6 percent times 12 months comes to 7.2 percent, not 7.4 percent. True ‘nuff, but keep in mind inflation is a compounding growth phenomenon, like cellulite on your first wife’s thighs. So we’re looking at 1.006 (one plus the monthly inflation rate) to the power of 12. Exponents, babe…exponents.

The monster may have been awakened, and this is serious stuff.

The inflation itself isn’t the worst part. It’s what it will do to interest rates and thus to economic growth that will have economists reaching for the Maalox.

The problem goes like so: A slowing economy can probably only be revived by a reduction in interest rates. Reducing interest rates, however, increases the supply of money, which heats up inflation. Therefore, if inflation is a problem–and now it is–the Federal Reserve Bank won’t reduce interest rates. The Fed may, in fact, increase them, in order to try to drive a stake through the inflation monster’s heart.

And…it gets even worse. Some of the arguments for growth-enhancing tax cuts in the United States get derailed by the specter of inflation. It’s hard to argue that the nation’s consumers (i.e. taxpayers) are strapped if they’re spending so much money that prices are being pushed up.

Uncle Sam could, in fact, be facing the dreaded prospect of “stagflation.” That’s a recession along with inflation. I remember such times. In technical terms…they sucked. Big time.

The most difficult economy in the world to predict is Uncle Sam’s. It’s huge, complex, diverse, and dynamic. The prospect of a recession, though, is probably foregone. The question is how deep it will be and how long it will drag out. If the latest inflation figures prove to be long term trends and not just aberrations, Uncle Sam has got a problem that’s a lot more serious than most people realize.

I’m not predicting gloom and doom. The U.S. economy is mondo strong in an absolute sense. But we tend to concentrate on growth rates, which is what recessions are all about.

So look for the next three months to be very nervous, at best; mildly ugly, most likely; and downright nasty, perhaps.

Ed Stephens, Jr. is an economist and columnist for the Saipan Tribune. “Ed4Saipan@yahoo.com”