by Norm Leahy

The Richmond Fed has released its Fifth District Surveys of manufacturing and service sector activity and the outlook for both is rather bleak. Output is falling, as are employment and wages. But what’s showing signs of growth? Inflation.

From the manufacturing report, we get this somber news:

District manufacturers reported that raw materials prices increased at an average annual rate of 4.16 percent in August — up somewhat from their 3.41 forecast in July. Finished goods prices rose at a 1.46 percent pace — also somewhat above July’s reading of 1.18 percent.

Looking forward, respondents expected that the prices they pay will advance at a 4.54 percent pace, somewhat higher than July’s reading of 4.35 percent. Additionally, contacts looked for finished goods prices to increase at a 3.35 percent annual rate, also slightly above last month’s expected rate of 2.97 percent.

And from the service sector survey:

Price change in August sped up slightly, with overall service sector price acceleration at an annualized 1.03 percent rate in August; last month’s rate was 0.79 percent. Retail price growth moved ahead at a 1.66 percent clip, following July’s 0.75 percent pace. At services firms, the pace edged up to 0.93 percent compared to 0.86 percent a month ago. For the six months ahead, survey respondents looked for price change of 1.48 percent; in July, their outlook was for 1.34 percent. Separately, retail merchants looked for prices to increase at a 2.08 percent rate during the next six months, while non-retail services providers expected a 1.39 percent pace. A month ago, retailers expected a 1.20 percent rate of increase and services providers anticipated price acceleration of 1.40 percent.

Some observers, like Harvard’s Ken Rogoff, believe inflation is the one tool that could right the national economy:

…the only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery.

Savers have already taken a sustained hit from falling interest rates and, with the Federal Reserve’s explicit policy of maintaining a zero interest rate target through mid-2013, they have little hope for relief. So why not add to their misery with a bit of inflation? And as for debtors…well. We’ve gone out of our way to keep them whole, to little effect. So let’s redouble our efforts.

The Richmond Fed’s surveys, though, indicate that inflation is already here and retailers and manufacturers see it getting worse. Which means we may imbibe Mr. Rogoff’s elixir no matter what.

And for history buffs, what do you call rising inflation and weak economic growth? If you answered “stagflation,” the monster everyone assumed had been slain in the early 1980s, you win…but in the long run, we all lose.