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Inflation Worries-Some Similarities but Mostly Differences with The Great Inflation of 1965-1982

Updated: Oct 25, 2021

The Economist October 9th 2021 pp69-70 |Finance & economics|The world economy|”Stagflation sensation” “Soaring energy prices and a faltering recovery invite comparisons with the 1970s. But the past is not the best guide to the present.”

Read The Economist for all the details

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Summary offered by 2244

Since there’s been light-at-the-end-of-the-pandemic-tunnel we've started worrying about a slowing economic recovery and the prospect of sustained price inflation. The latest report of American inflation at 5% suggests that price increases may not simply be a blip due to temporary supply-chain inefficiencies. These concerns have triggered pundits, politicians and some economists to speculate about whether or not we are experiencing a resurgence of the 1970s-type of stagflation.

What were the features of 1970s stagflation?

"During the 1973 Arab-Israeli War, Arab members of the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo against the United States in retaliation for the U.S. decision to re-supply the Israeli military to gain leverage in the post-war negotiations. (Source Other countries that were affected for supporting Israel included the Netherlands, Portugal and South Africa. "The embargo both banned petroleum exports to the targeted nations and introduced cuts in oil production." At the time America was heavily dependent on OPEC oil. "The price of oil per barrel first doubled, then quadrupled, imposing skyrocketing costs on consumers and structural challenges to the stability of whole national economies. (ibid)

During the 1970s Governments and Central bankers followed their traditional training and experience. The thinking then “tolerated rising inflation...[that]...prioritized lower unemployment over stable prices.”

With energy inflation consumers necessarily pulled back on other buying and output productivity fell.

Responding to eroding buying power, workers heavily unionized in the 1970s, sought and got wage increases. These wage and COLA increases raised input costs that were eventually also passed-on to consumers.

How are conditions similar today?

Crude oil prices were below $20/Barrel after the onset of the pandemic. Since then prices hit $42 in January 2021, were about $62 in August, $71 in September, and now are $83 (Source Trading Economics.Com). In the prior five years, excepting the pandemic lows, prices have oscillated between $50 and $70/Barrel.

Oil prices are higher, currently about 20-70% higher than the prior five years, but the energy crunch is especially difficult in China where electrical generation is highly dependent on coal. As part of China's Green Initiatives and Mine-Safety concerns domestic coal production has decreased. Also constraining the Chinese coal supply, China's political pressure on Australia has led the Chinese government to levy an import-embargo on Australian coal. This coal shortage has led to plant furloughs in China causing a subsequent fall in output and productivity.

Coming out of the pandemic, with certain shortages, worldwide input prices and consumer prices increased (See Charts in The Economist). These increases were initially considered temporary as they were related to delays in the supply chain. Looking at the data, input and output prices contracted early in the pandemic but rose thereafter. Since then input prices have increased progressively and to a lesser extent so have output prices.

Workers coming out of the pandemic have seen wages rise.

How are conditions different today?

American productivity is still high coming out of the pandemic. During the “Great Inflation of 1965-82 Consumer prices rose more than 6% while GDP per person was 2%. Currently, consumer prices have increased more than 5% but GDP per person is nearly 6%.

And while wages are higher recently, labor-bargaining power is much less than in the 1970s.

Today, Governments and Central bankers are willing to use tools, at their disposal, to keep inflation “consistent with our longer-run goal of 2%.


The economy today is more integrated “through financial markets and supply chain; “trade as a share of global GDP...has more than doubled since 1970.

While the past may not be the best model, what might happen?

Rising energy prices are a concern for extending the economic recovery as those costs will consume more of “households’ and companies’ budgets and hit spending and production.”

Currently governments are looking to pare back the stimulus programs that have aided the recovery. If those efforts are too aggressive it could put additional pressure on prices.


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