Here’s a short article that succinctly describes what stagflation is: an increase in costs combined with stagnant incomes. In this case, the discussion is in the context of Social Security benefits, but it could easily be extrapolated out to working Americans. The government says inflation isn’t happening. Thus, people don’t need cost of living increases. Yet they base their decision on a flawed set of indicators; they only look at prices that aren’t volatile, which excludes food, energy, health care and the like. By leaving those out, one gets the result there is no inflation, hence no need for payment increases. But here’s the most clear example of what’s really happening: “If you could go through the year without eating, driving, heating your home, or seeing the doctor, you wouldn’t experience any inflation. But if such expenditures accounted for a disproportionate share of spending, as they do for many seniors, then you’d be experiencing a lot of inflation.”
If you are a working American, this is what is happening with your budget right now. You are not earning more – and may in fact be earning less – but the necessities of life are costing you more. That’s stagflation.
The Social Security Catch-22
Once again, Americans — and the American economy — are caught in something of a Catch-22. Inflation has been extremely muted for the past couple of years, in large part because consumer demand for goods and services fell so deeply in the Great Recession of 2008-09. Even though the economy began to grow in the summer of 2009, the expansion has been fitful. Why? Part of it is because consumers, who account for 70 percent of economic activity, haven’t seen their incomes rise. And with consumers unwilling to spend, producers and retailers have had a difficult time pushing through price increases. Weak demand, spurred by stagnant incomes, leads to no inflation. And for the 58 million people who depend on Social Security or Supplemental Security Income (SSI), no inflation translates into no increase in income.
Here’s the deal. According to the Social Security Act, payments increase automatically if the Consumer Price Index (CPI) rises from the “third quarter of the last year a cost-of-living adjustment (COLA) was determined to the third quarter of the current year.” For 2009, there was a 5.8 percent increase in benefits, largely because the CPI rose 5.4 percent between September 2007 and September 2008. But in the wake of the financial crisis, inflation morphed quickly into deflation, as this chart shows. Between September 2008 and September 2009, the CPI fell 1.3 percent. The result: no Social Security COLA increase for 2010.
And so this fall, when the Social Security Administration sought to determine whether there should be a COLA for 2011, it didn’t simply look at whether prices had risen broadly in the past year. (They have. Between September 2009 and September 2010, as the Bureau of Labor Statistics reported today, inflation rose 1.3 percent.) Rather, it sought to look at where prices were compared with where they were in the “third quarter of the last year a cost-of-living adjustment (COLA) was determined” — i.e. 2008. And as this table shows, the CPI in September 2010, at 218.439, was still slightly below where it was in September 2008, at 218.783.
In theory, this makes sense. If prices don’t rise, people who depend on fixed-incomes should be able to maintain their lifestyle with the same level of income. But this overlooks some important developments in the economy at large that impact seniors and others on fixed incomes.
First, while the overall inflation rate is muted, some things are getting more expensive. The monthly report describes what’s been happening to the prices of various goods and services. In the past 12 months, the overall inflation rate has been just 1.1 percent. But the cost of some things has risen more than that. Food is up 1.4 percent, fuel oil is up 11 percent, gasoline is up 5.8 percent, and medical care services are up 3.7 percent. (The cost of shelter and clothing fell). If you could go through the year without eating, driving, heating your home, or seeing the doctor, you wouldn’t experience any inflation. But if such expenditures accounted for a disproportionate share of spending, as they do for many seniors, then you’d be experiencing a lot of inflation.
Second, the same macroeconomic conditions that are keeping prices and inflation low — and hence keeping Social Security benefits in check — are keeping interest rates low. That’s great for borrowers. But it’s terrible for savers, and for the many seniors who depend on the interest from municipal bonds or savings accounts for a chunk of their income. Many savers have seen their interest income sliced in half or more.
The only good news in this scenario? Even if overall prices rise only a bit in the coming year, there should be a Social Security COLA increase for 2012.
Daniel Gross is economics editor and columnist at Yahoo! Finance.