Real threat is uncertainty, not stagflation:James Saft

By James Saft

LONDON (Reuters) - The problem isn't stagflation, scary as the specter of an ugly mix of poor or negative growth and high inflation is for investors. The problem is knowing which of the two to fear and fight.

A sustained period of both the fire of inflation and the ice of a credit crunch-induced slowdown is highly unlikely.

But with the U.S. and European economies giving out mixed signals, the big risk is that central bankers delay the needed remedy.

Markets have sold off in recent days as data seemed to show that inflation was again taking root, suggesting a possible bout of 1970s-style stagflation of economic growth woes combined with uncontrolled price rises.

Former Fed chief Alan Greenspan, who must haunt successor Ben Bernanke's dreams, helpfully took up the cry in an interview with American television over the weekend.

"We are beginning to get not stagflation, but the early symptoms of it," Greenspan said.

And indeed some of the data, prompted by soaring fuel and food prices, are troubling.

Headline U.S. consumer price inflation hit 4.3 percent in November from the year before, while producer price inflation at 3.2 percent on a year-on-year basis was its fastest since 1973, a time when comedians made a living telling jokes about the rising price of meat.

Euro zone inflation also rose in the month, to 3.1 percent year-on-year, the steepest rate in more than six years.

This comes against a background of the biggest housing downturn in more than a decade, a hobbled banking system and a potentially intractable credit crunch.

But while the combination of inflation and poor growth is daunting, currency strategist Stephen Jen of Morgan Stanley points out that the inflation data reflects the immediate past, rather than the future.

U.S. growth in the third quarter will be close to five percent and consumption is still strong.

"I continue to believe that if the U.S. falls into recession, inflation will decelerate," he wrote in a note to clients.

"The idea that the world suffers from stagflation is a notion I don't find compelling.

"Central banks are indeed in a difficult situation, because of the uncertainty of where the global economy is heading, rather than the risk that growth could fall while inflation accelerates."