The FOMC meeting notes from December 14 released yesterday will have people talking. They will now be focused on two numbers: GDP and CPI.

From Wikipedia: "As of 2004 global stagflation is making a comeback with the price of oil over $40 a barrel, the US government slowly increasing interest rates, and employment rates stagnant."

The latest real GDP (gross domestic product = value-added production) figures were released last week. They indicated, provisionally, that seasonally-adjusted GDP was down in the June 2000 quarter. More importantly, the actual non-adjusted GDP statistic was 4.4% up on the June 1999 quarter. Hardly stagnation.

Real GDP increased at an annual rate of 4.0 percent in Q3 2004, according to final estimates of the Bureau of Economic Analysis agency of the U.S. Department of Commerce, released December 22. This number is now anticipated to fall to the range of 3.0 " 3.1 percent in Q1 2005, which is a slowing of economic growth.

The latest reported CPI, from the BLS is +3.5% (NSA) annualized since Nov 2003. This number is rising.

So when CPI starts to rise faster than GDP, there is this problem called Stagflation, and it happened in the 1970's on account of the Vietnam War, and it's starting to happen now on account of the War on Terrorism.

Stagflation is viewed as a cost (supply-side) inflation with "too many dollars chasing too few goods", whereas normal (demand) inflation is depicted as "too many dollars chasing too few goods". It's a matter of emphasis.

With today's stress on productivity increases, as reflected in a concept like Just In Time inventories e.g., minimal refined gasoline inventories, and pushed by marketing forces that focus the attention of buyers on a few "hot" brands, it is a fact that prices are rising quickly. And corporations are looking hard for growth from those areas of their business having "pricing power."

If we had a problem with demand inflation, for instance, the recent spike of crude oil prices would have been sustained at $55 or go even higher based on economic growth, but the fact was that oil prices spiked based on trading speculation that was generated by interpretation of low inventories, etc.

My feeling is that economists are going to have a Battle Royale over this issue in 2005, but the rest of us just have to look at the Yield Curve, which is presented in the bond yield numbers at Yahoo Finance.

The Yield Curve is flattening, and getting to a point that ought to be of concern for investors who are basing decisions on expectations of a vibrant economy. When economic conditions are best suited to growth in the normal business cycle, the yield spread between the 3-month and 30-year U.S. Treasury debt should be 3.00 points or 300 basis points (bp).

Today, the yield spread fell to 2.67 earlier this morning from last week's 2.84. (Now it's at 2.66.) A couple month's ago, the yield spread was a healthy 3.00, and equity investors decided to come back into the market. But, if the yield spread continues to narrow to 2.50 or less, there will be more selling pressure in the equity markets.

As a securities trader, you can take your cue from this number. It's like a racing car driver watching the trackside flags. Right now, it's yellow (extreme caution). The flag man is starting to wave it a little faster, which is still ok for the bulls, but if he pulls out the black flag, you ought to head for the pits, and finish up your racing for the day.

So are we moving into a period of both recession and inflation? You tell me!

Actually, because all this discussion of economics is mostly based mostly on matters of perception and not facts, I think I will just let the market will tell me.

BCara@BillCara.com