The stag is back

Marketwatch is talking about stagflation - high inflation and low economic growth - due to a strong increase in "core inflation" in February. The main concern with stagflation is that inflation - typically fought with higher interest rates - is combined with slow economic growth - typically fought with lower interest rates - leaving the Federal Reserve in a bind.

As I discussed in July, the situation now isn't quite the 1970s. Inflation (2.4% annual rate) is not even half the inflation rates in the 1970s - 7% per year - nor is the current GDP growth (2.4%, adjusted for inflation) as low - 1% per year in the 1970s. However, there's an interesting piece of economic theory that suggests caution instead of optimism.

The phenomenon of stagflation is an aberration of the Phillips Curve, an economic theory that suggested that inflation and unemployment move in opposite directions. In other words, as unemployment falls, workers get higher wages which drives up inflation. In reverse, unemployment solves inflation when laid off workers bid each other's wages down.

The Economist (subscription required) notes that this theory only works when central banks - like the Federal Reserve - are in harmony with the public about inflation (e.g. that both believe that the bank will help regulate inflation instead of the public going out and demanding higher wages). If the public sees high gas prices and feels they need a bigger paycheck, then these demands will push inflation even higher. The result is that when the bank has to tighten the interest rate screws, the resulting recession will be even worse.

Conclusion? Stagflation '07 has nothing on the 1970s, but the continual pressure of high energy prices and the slowing economy doesn't bode well.

Houses are homes, not investments

While you're still better off building equity instead of paying rent (and deducting mortgage interest from your taxes), my friend at 28th Avenue notes that the housing market isn't the greatest right now.

The big thing: don't expect a lot of value appreciation in your home in the next couple years. 28th links to Calculated Risk, which quotes Fed Chair Bernanke:

To the downside, the correction in the housing market could turn out to be more severe than we currently expect, perhaps exacerbated by problems in the subprime sector. Moreover, we could yet see greater spillover from the weakness in housing to employment and consumer spending than has occurred thus far.

Update 4/12: Check out the comments from EKM, where he links to an amazing tool posted by the New York Times for calculating whether it's better to rent or buy in your particular area.