The Other “Flation” You Should Be Thinking About

You read it in the headlines. You hear about it on the evening news. 

You see it at the supermarket and the gas pump. 

It’s top of mind everywhere.


Nobody likes inflation. It weakens your dollars. It’s a tax on the poor and middle class.

It sucks!

What could possibly be worse?

Well let’s talk about that…

The Other ‘Flation…

It comes in a package of soaring prices, high unemployment, and weak economic growth. 

You might call it the worst of all worlds!

It’s called stagflation

For years, economists believed that such a condition was impossible because of something called the Phillips Curve. Phillips maintained that there was an inverse relationship between inflation and unemployment. Higher inflation implied greater productivity which, in turn, implied lower unemployment. Conversely a deflationary price environment would signal rising unemployment.

It became a popular theory, especially after the Great Depression. 

But despite a rock solid belief in the Phillips Curve that declared stagflation to be the economic equivalent of Bigfoot, the economy once again proved the smart guys (who think they know everything) aren’t so smart.

In fact, if you’re old enough to remember the 1970s, you probably remember how wrong they all were. 

[As a side note: The appearance of stagflation in the 1970s led to the smart guys creating something called the “Misery Index” — because we obviously needed some kind of index to tell us how miserable we all were.]

So let’s take a step back and look at the broader economic picture and see where we stand when it comes to the elements of stagflation.

Inflation is Pretty Much a “Gimme”

I won’t spend too much time here. Inflation is a topic being covered basically everywhere… including right here. 

We talked about it last week when we dove a level deeper than typical government reports and took a look at household expectations… 

“Consumers are catching on that inflation isn’t just some temporary phenomenon that will self-correct in the coming months. And they’re not optimistic about their financial futures.”

This week, headlines reported that Procter & Gamble was planning on raising prices across a wide range of products:

—The Epoch Times

Also this week, John Catsiatidis, the president of Gristedes and D’Agostino Foods offered a pretty shocking prediction in an interview with Fox Business:

“I see food prices going up tremendously, … [CEOs] want to be ahead of the curve and the way they’re doing it is they’re dropping all promotions. They are dropping low-moving items. …  “I see over 10% [price increase] in the next 60 days,” he said.” [emph added]

I think we can all agree inflation is already a reality. So let’s turn our attention to the employment side of the equation

What’s Really Going on in the Labor Market?

Each month the Bureau of Labor Statistics reports its unemployment number. This past month the rate fell to 4.8% — the lowest rate in 16 months. That should be good news, no?

Actually the unemployment rate is one of the most manipulated numbers the government puts out. 

The number they report is called “U3” which only accounts for those actively seeking employment. That means if you’re content sitting on your couch or just plain discouraged, you’re no longer “unemployed” — you’re “marginally attached.”

The U3 number is pretty much a farce.

The broadest number, known as “U6,” is only slightly better. It includes those marginally attached — but only for 12 months, which the BLS considers the job seeking window. So if you’re still marginally attached after a year, congratulations! You’re no longer unemployed!

Non-farm payrolls — the number of nonfarm jobs added to the workforce — on the other hand, is a better estimate of the labor situation. This number has dropped precipitously over the last two months, missing last month’s estimates dramatically.

Longer term, monthly job growth has come in at roughly half of what Fed officials were predicting at the start of the year.

But another telling (and less well known) report is called the Job Openings and Labor Turnover Survey (JOLTS for short). Job openings typically indicate demand for labor within the economy. Higher demand for labor is usually a good sign. 

But maybe not so much now.

After rising for seven straight months to all-time highs, August job openings (the JOLTS report is released a month behind most other economic reports) showed 10.4 million available jobs.

August Job Openings


But what was even more shocking than the near record number of unfilled jobs was the number of “quits” — the number of people leaving their jobs. That number for August increased to 4.3 million people — the highest on record. 

Jobs are there with nobody to fill them. At the same time there seems to be a rather large exodus from the labor force. 

These numbers paint a mixed picture AT BEST.

The bottom line is: Unless you have a productive workforce, you’re not going to generate growth in the economy.

Which brings us to the final kicker. Growth…

The Elephant in the Room

Economic success is all about growth. And GDP is our main measure of growth.   

A little background so you understand how these numbers work. 

Every month, the Bureau of Economic Analysis (aka the BEA) releases a growth estimate for the preceding quarter. (In Q2 they’ll report on Q1 and so on.) The first month’s estimate is called an advance estimate. There’s a second revised estimate the following month. Then a final number is posted in the last month of the quarter.

Advance numbers typically get all the press, while revisions are quietly absorbed into the market. So how’s the economy been doing this year?

The first quarter of 2021 ended with 6.3% growth while the second quarter came in at 6.7%.

So far so good.

Next week (October 28), the guesses start coming for how we did in Q3. And forecasts are for a drop to 5.1%. Down, but considering during “normal” times GDP growth averages in the vicinity of the 3% range, not terrible.

Now comes the bad news.

A lone voice in the wilderness — the Atlanta Federal Reserve — has something dramatically different to say about those expectations. 

The Atlanta Fed publishes a report called “GDPNow” which they describe as “a running estimate of real GDP growth based on available economic data for the current measured quarter.” A “live” version of GDP instead of the official reports that take three months to calculate and revise.

What are they seeing for the third quarter? 

A stunning 0.5%!

(And that’s down from 1.2% earlier in the month.)

If the Atlanta Fed’s realtime model proves to be on target, things could be looking really bad, really soon.  

Put It All Together and What Do You Get?

This is really a potential worst case scenario in the making. 

Inflation is a reality and acknowledged by most (thinking people at least) as not going away any time soon (i.e. it’s not “transitory”).

(Any attempts to deal with inflation, would put a further damper on economic growth and likely stick a pin in the asset bubble that is the current stock market.)

The labor market is experiencing unfillable demand, which is NOT good for the economy. 

And growth prospects going forward are looking troubling.

If all these trends continue, we may be reporting on the misery index before you know it!

Make the trend your friend,

Bob Byrne
Editor, Streetlight Confidential