REMEMBER the "misery index"?
During the frustrating 1970s, economists used it as a shorthand measure of the pain imposed by simultaneously rising consumer prices and joblessness. Simply adding up the inflation and unemployment rates roughly quantified "stagflation," a phenomenon that defied the economic theory under which inflation and recession were supposed to be mutually exclusive.
The misery index averaged 16.27 during President Jimmy Carter's term, peaking at a post-1948 high of 21.98 in the middle of his unsuccessful 1980 reelection campaign. The best index since then was 5.74 in April, 1998, under President Bill Clinton. It's been creeping up since, hitting 9.2 in January. The word "stagflation" is once again on the lips of serious economists.
And the culprit is not just the current economic slowdown, which has increased the ranks of the jobless, but inflation - the dragon from the '70s that seemed to have been slain by a combination of the Federal Reserve's tight-money policies and low prices for globally traded commodities such as oil. The inflation rate hit 4.3 percent last month, higher than it's been in almost two decades - and, interestingly enough, only a tiny bit below the 4.36 percent rate that prompted President Richard Nixon to declare wage and price controls in mid-1971.
As in the 1970s, much of today's price rise is driven by oil, which has pierced the $100 per barrel level. Even "core inflation," which excludes food and energy, is now running at 2.5 percent, however. This is slightly less than the 2006 annual rate but still well above the Federal Reserve's target of 1 to 2 percent.
Small wonder, then, that members of the Fed's board of governors have begun emphasizing inflation fighting in their recent public comments. At the Federal Open Market Committee's most recent meeting three weeks ago, more rate cuts were entertained, but some members spoke of a "rapid reversal" of them once the economy perks up.
Comparisons with the 1970s should not be overdone. Among the differences between now and then is that labor unions are much weaker today and are thus less able to bargain for higher wages, which companies pass on to consumers. The slowing economy should reduce inflation, in part because falling demand for oil will help moderate its price.
Still, the talk of stagflation illustrates what was obvious even before the Fed began using rate cuts to stave off recession: U.S. monetary authorities have relatively little room to maneuver. The worry is that the economy will be sluggish in 2008 - even though the Fed has pumped in all the cheaper money it could provide consistent with its anti-inflation mission, and maybe a little bit more.