Stagflation?!?!

Investors have been doing a lot of worrying lately as they witness a steady rise in prices coupled with a slowing economy.

Inflation has been going up and has now reached a point where the Fed has begun to show concern. Escalating prices for oil and other commodities has put heavy pressure on all other prices throughout the economy. This shown by the rate at which consumer prices rose in March; double that of previous forecasts and highest in almost three years. To counter higher inflationary rates, the Fed has already raised its federal funds rate.

However, higher rates could slow economic growth. There are signs that the economy is slowing. For example, retail sales fell in March and the trade deficit hit a record in February. This rise in inflation/prices coupled with a slow or stagnant economy seems to forecast stagflation; or does it?

Recent data has shown that even though oil prices have risen (indicating inflation), personal consumption inflation has remained pretty reasonable. Others argue that rising inflation rates are usually accompanied by strong growth which gives little reason to be afraid.

The problem is that if the Fed quits raising interest rates to fight the inflation rates, the market might experience extremely high inflation which will further slow the economy. If they Fed keeps raising interest rates, it may not only affect inflation, but also the real estate market; a market shown to have great effect on the growth of the economy. Additionally, oil prices show little sign of a decrease in the summer months ahead which will hurt consumer spending even further.

It almost looks as if we might be in a 'stalemate;' the game's not over but we have no moves left to make. A sharp decline in oil prices could prove to be the hand that helps us out of this economic hole we're digging.