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Investors looking for a silver lining to the weak jobs picture in the United States should consider this: the recent rise in unemployment may move the U.S. further away from the danger of stagflation.

At least that will be the case if the historical relationship between the jobless rate and inflation holds up. It suggests that annual consumer price growth rarely surpasses the unemployment rate for long.

The last two times it did so on a protracted basis coincided with the stagflationary periods of low growth and high inflation during the 1970s and 1980s. Recently, the two measures have gotten close, but not crossed over.

Analysts say this spread is not an indicator they track, though it does reflect inflationary shocks, such as surging oil prices that can push up costs throughout the economy.

“That’s kind of like the old misery index,” said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York.

“You get periods like this where inflation and unemployment are both rising when there are things like commodity-price, cost-push inflation.”
MISERABLE

The misery index Lantz refers to is the unemployment rate added to annual inflation rate. It is based on the notion that a worsening of both has a wide range of effects on the economy and well-being of consumers.

The measure, which goes back to 1948, reached an all-time high in 1980, when the economy was last in the grips of stagflation. That was also when inflation recorded its biggest jump over unemployment in the last 60 years, with the rate of consumer price growth accelerating to 8.5 percentage points more than the jobless rate.

At that time, in March 1980, annual consumer price inflation was an extraordinary 14.8 percent and unemployment was 6.3 percent. The misery index peaked at 21.98 in June 1980. [Read more →]

(Fortune Small Business) — With commodity, fuel and insurance costs hitting record highs, small-business owners are anxious about next week’s federal minimum wage hike, which will require employers in 26 states and the District of Columbia to raise their base to at least $6.55.

Next week’s increase of the current $5.85/hour minimum wage is the second of three consecutive annual hikes mandated by a 2007 amendment to the Fair Labor Standards Act, known as the Fair Minimum Wage Act.

When legislators nationwide began a push two years ago for minimum-wage increases, Fortune Small Business found that many entrepreneurs considered the issue irrelevant. Amid a tight labor market, most owners were already paying higher-than-required wages to attract and retain workers, even entry-level ones.

Today’s economic climate is very different. Prices for a wide range of business commodities, from gas to grain, are soaring. The Labor Department reported a net loss of 62,000 jobs in June, the sixth straight month of losses. The National Federation of Independent Business’s (NFIB) latest installment of its monthly Small Business Economic Trends found that 18% of business owners polled cut staff in June.

As next week’s wage hike approaches, small-business owners such as Joy Kealey view the mandatory increase as another frustrating pinch on profits.

Kealey owns a Boise pizza chain called Chicago Connection in Idaho, one of nine states with a minimum wage set at the federal level. Five states have no minimum wage and by default follow the federal standard, while three states have state minimum below the federal level, according to the Department of Labor. (For all but a handful of exempt positions, the federal minimum overrides the state law and becomes the de facto minimum.) The remaining 33 states have their own minimum wage rates, many higher than the new mandated minimum. In total, 26 states (plus Washington, D.C., which will raise its rate to $1 above the federal rate) will be affected by next week’s change.

President Bush on Saturday tried to pin the blame on Congress for soaring energy prices and said lawmakers need to lift long-standing restrictions on drilling for oil in pristine lands and offshore tracts believed to hold huge reserves of fuel.

“It’s time for members of Congress to address the pain that high gas prices are causing our citizens,” the president said. “Every extra dollar that American families spend because of high gas prices is one less dollar they can use to put food on the table or send a child to college. The American people deserve better.”

With gasoline prices above $4 a gallon, Bush and his Republican allies think Americans are more willing to allow drilling offshore and in an Alaska wildlife refuge that environmentalists have fought successfully for decades to protect.

Nearly half the people surveyed by the Pew Research Center in late June said they now consider energy exploration and drilling more important than conservation, compared with a little over a third who felt that way only five months ago. The sharpest shift in attitude came among political liberals.

Democrats say they are for drilling, but argue that oil companies aren’t going after the oil where they already have leases. So why open new, protected areas? they ask. Democrats say there are 68 million acres of federal land and waters where oil and gas companies hold leases, but aren’t producing oil.

“Americans are fed up every time they go to fill up and they’re right to demand action. But instead of a serious response, President Bush and his allies simply repeat the same old line more drilling,” Rep. Chris Van Hollen, D-Md., said in the Democrats’ radio address.

“Democrats support more drilling,” he said. “In fact, what the president hasn’t told you is that the oil companies are already sitting on 68 million acres of federal lands with the potential to nearly double U.S. oil production. That is why in the coming days congressional Democrats will vote on ‘Use It or Lose It’ legislation requiring the big oil companies to develop these resources or lose their leases to someone else who will.”

“But we know that drilling by itself will not solve the problem of high gas prices,” Van Hollen said. “We cannot drill our way to energy independence.”

He cited Democrats’ calls to tap the nation’s Strategic Petroleum Reserve, because it is full and “America’s rainy day is now.” And he said the country must focus on new energy policies that focus on alternatives to oil.

Bush said that Democrats are at fault and that “Americans are increasingly frustrated with Congress’ failure to take action.

“One of the factors driving up high gas prices is that many of our oil deposits here in the United States have been put off-limits for exploration and production. Past efforts to meet the demand for oil by expanding domestic resources have been repeatedly rejected by Democrats in Congress.”

Bush repeated his call for Congress to lift the restrictions, including a ban on offshore drilling. A succession of presidents from George H.W. Bush to Bill Clinton to the current president have sided against drilling in these waters as has Congress each year for 27 years, seeking to protect beaches and coastal states’ tourism economies

Oil companies once viewed drilling in the deep waters off Florida as cost prohibitive. Politicians feared even the slightest sign of support would be career suicide.

No more. Record crude oil prices are fueling support for oil and natural gas exploration off the nation’s shores. In Florida, movement was underway even before President Bush called on Congress last month to lift a federal moratorium that’s barred new offshore drilling since 1981.

The early activity here stems from a 2006 Congressional compromise that allows drilling on 8.3 million acres more than 125 miles off the Panhandle - an area that had been covered by the moratorium, which was enacted out of environmental concerns. In exchange, the state got a no-drilling buffer along the rest of its beaches.

Florida may turn out to be a prelude for other coastal states. If oil or natural gas deposits are found in the newly opened region, experts say it could further the push to explore other once-protected areas everywhere. It also could be a rallying point for critics, who say the new exploration isn’t a license to expand exploration.

With gas topping $4 a gallon, recent polls show Americans, Floridians included, more supportive of drilling in protected areas. Some politicians - including Gov. Charlie Crist - have switched sides.

“We think the public is way out ahead of the politicians on these issues. People are more open to (offshore drilling) now,” said Tom Moskitis, spokesman for the American Gas Association, a trade group.

At the same time, oil companies, driven by the record energy price, are more willing to risk $100 million or more to begin exploring new regions. The Interior Department estimates there could be 18 billion barrels of oil and 77 trillion cubic feet of natural gas beneath the 574 million acres of federal coastal waters that are now off-limits.

The economic downturn is hitting middle-aged and older American workers hard, forcing more than one in four to postpone retirement, according to a survey released Tuesday by the AARP.

Twenty-seven percent of workers aged 45 and older said they had put their retirement plans on hold because of the slowing economy, AARP reported.

“The current economic downturn is forcing millions of Americans to make very difficult decisions on their immediate survival and long-term financial security,” Tom Nelson, AARP’s chief operating officer, said in a statement.

Baby boomers and retirees agree that the economy is in bad or fairly bad condition and that the government should be doing more to help, the survey of Americans 45 and over showed.

Eighty-one percent said the economy is weak, and 74% said their elected officials were not doing enough to help people who are being squeezed by the slowdown.

Boomers hurting more than their parents. Boomers - those between the ages of 45 and 64 - are feeling the impact of the slowdown more than their parents and are reacting in ways that have risky implications for the future, the AARP said.

Nearly one in four boomers said they were taking money out of their 401(k) retirement plans and other investments early.

“Taking money out of your retirement savings has a compounding effect because that money is not allowed to grow at a time when you have fewer working years to replace the losses,” Nelson said.

Younger boomers between the ages of 45 and 54 are having a particularly difficult time, with 17% of them saying they had cut back on medications. By comparison, only 10% of Americans 65 and older said they were doing the same.

Older Americans struggle too, but they cope better. Americans aged 65 and older are struggling too. Nearly 59% in this age group said they were having trouble keeping up with the rising costs of food, gas and medicine.

But this older generation of Americans has more experience dealing with higher costs on a fixed income. They’re also more likely to own their own home and be covered by healthcare programs like Medicare, the report said.

 Americans are feeling a lot more economic pain than the government’s official statistics would lead you to believe, according to a growing number of experts.

They argue that figures for unemployment and inflation are being understated by the government.

Unemployment and inflation are typically added together to come up with a so-called “Misery Index.”

The “Misery Index” was often cited during periods of high unemployment and inflation, such as the mid 1970s and late 1970s to early 1980s.

And some fear the economy may be approaching those levels again.

The official numbers produce a current Misery Index of only 8.9 - inflation of 3.9% plus unemployment of 5%. That’s not far from the Misery Index’s low of 6.1 seen in 1998.

But using the estimates on CPI and unemployment from economists skeptical of the government numbers, the Misery Index is actually in the teens. Some worry it could even approach the post-World War II record of 20.6 in 1980.

“We’re looking at government numbers that are really out of whack,” said Kevin Phillips, author of the book “Bad Money.”

According to the government’s most recent Consumer Price Index, a key inflation reading, consumer prices rose 3.9% in the 12 months ending in April, down slightly from the 4% annual inflation rate in March despite record gasoline prices.

But Phillips argues that consumer prices are probably up at least 5% and perhaps more than 10%.

Part of the disconnect may be due to the fact that nondurable goods, such as food and gasoline, makes up only 12% of CPI.

In addition, food and energy prices are eliminated from the so-called core CPI, which many economists tend to focus more closely on because they claim food and gas prices are volatile.

But food and energy costs are a very important part of household budgets. And those prices have been skyrocketing: Gas prices were up about 21% over the 12 months ending in April.

However, due to seasonal adjustments in the CPI, the government reported that gas prices were down 2% in April, even though on a non-adjusted basis, gas prices rose 5.6% from March.

And even that number may be too low. Measures of gasoline prices by AAA and the Department of Energy suggested prices rose as much as 10% in April.

Meanwhile, food prices rose 5.1% over the last 12 months, according to the report. The nearly 1% one-month jump in food prices in April was the biggest spike in 18 years.