Concerns about stagflation, a flashback to the 1970s, begin to grow

WASHINGTON – stagflation. It was the dreaded “S word” of the 1970s.

For Americans of a certain age, it conjures up memories of excruciatingly long lines at gas stations, closed factories and President Gerald Ford’s much-mocked “Whip Inflation Now” buttons.

Stagflation is the bitterest of all economic pills: high inflation mixes with a weak labor market to create a toxic concoction that penalizes consumers and confuses economists.

For decades, most economists thought such a foul brew impossible. They had long assumed that inflation would only run high when the economy was strong and unemployment was low.

But an unfortunate coincidence of events has caused economists to hark back to the days of the disco and somber economy with high inflation and high unemployment almost half a century ago. Few believe that stagflation is on the horizon. But as a longer-term threat, it can no longer be dismissed out of hand.

Treasury Secretary Janet Yellen quoted that word in a remark to reporters last week:


“The global economic outlook,” Yellen said, “is challenging and uncertain, and higher food and energy prices are having stagflationary effects, namely falling production and spending and rising inflation around the world.”

On Thursday, the government estimated the economy contracted 1.5% annually from January to March. But the decline was mainly due to two factors that don’t reflect the economy’s underlying strength: a widening trade gap caused by Americans’ appetite for foreign products and a slowing in corporate inventory replenishment after a big holiday season surge.

For now, economists are largely in agreement that the US economy has enough momentum to avoid a recession. But the problems are piling up. Supply chain bottlenecks and disruptions from Russia’s war in Ukraine have pushed consumer prices higher than in decades.

The Federal Reserve and other central banks, caught off guard by raging inflation, are scrambling to catch up by aggressively raising interest rates. They hope to cool growth enough to tame inflation without triggering a recession.


It’s a notoriously difficult task. The widespread fear, reflected in slumping stock prices, is that the Fed will end up botching it and crushing the economy without dealing a knockout blow to inflation.

This month, former Fed chairman Ben Bernanke told the New York Times that “inflation is still too high, but it’s coming down. So there should be a period over the next year or two where growth is low, unemployment is up at least a little bit, and inflation is still high.”

And then Bernanke summed up his thoughts: “You could call that stagflation.”



There is no formal definition or specific statistical threshold.

Mark Zandi, chief economist at Moody’s Analytics, has his own rough guide: Stagflation comes in the United States, he says, when the unemployment rate hits at least 5% and consumer prices are up 5% or more year-over-year. The US unemployment rate is now just 3.6%.


In the European Union, where unemployment is typically higher, Zandi’s threshold is different: he believes 9% unemployment and 4% annual inflation together would cause stagflation.

Until about 50 years ago, economists thought stagflation was almost impossible. They turned down what is called the Phillips curve, named after its creator, the New Zealand economist AWH “Bill” Phillips (1914-1975). This theory states that inflation and unemployment move in opposite directions.

It sounds like common sense: when the economy is weak and many people are unemployed, companies have a hard time raising prices. So inflation should stay low. If the economy is hot enough for companies to be able to pass large price increases on to their customers, unemployment should remain fairly low as well.

Somehow, the reality turned out to be not so simple. What can throw things off course is a supply shock – say, a rise in commodity costs that fuels inflation and leaves consumers with less cash to stimulate the economy.


This is exactly what happened in the 1970s.

Saudi Arabia and other oil-producing countries imposed an oil embargo on the United States and other countries that supported Israel in the 1973 Yom Kippur War. Oil prices skyrocketed and stayed high. The cost of living became unaffordable for many. The economy faltered.

Enter stagflation. From 1974 to 1982, inflation and unemployment in the United States both topped 5% each year. The combination of the two numbers, known as the “misery index,” peaked at 20.6 in 1980.

Stagnation, and particularly chronically high inflation, became a defining feature of the 1970s. Political figures tried in vain to address the problem. President Richard Nixon unsuccessfully resorted to wage and price controls. The Ford administration issued “whiplash inflation now” buttons. The reaction was mainly derision.


no The glass of stagflation is only half full for now.


There is certainly “flation” going on: Consumer prices rose 8.3% year-on-year in April, just below a 41-year high set the previous month.

Consumer prices are rising largely as the economy rebounded from the short but devastating pandemic recession with unexpected force. Factories, ports and rail yards have been overwhelmed trying to keep up with an unexpected surge in customer orders. The result was delays, bottlenecks and higher prices.

Critics also blame President Joe Biden’s March 2021 $1.9 trillion stimulus plan for overheating an already hot economy. The war in Ukraine made matters worse, disrupting energy and food trade and driving up prices.

But the “Hirsch” is still a long way off: Although the government reported on Thursday that economic output had shrunk from January to March, the labor market is still booming.

Last year, employers created more than 400,000 jobs every month. At 3.6%, the unemployment rate is just above the 50-year low. This week, the Fed reported that Americans are in sound financial shape: Nearly eight in 10 adults said they were “fine or comfortable” last fall — the highest proportion since the Fed began reporting in 2013 to ask question.


Nevertheless, the risks are piling up. The same applies to concerns about possible stagflation. Fed Chair Jerome Powell acknowledged this month that the central bank may not be able to achieve a soft landing and avoid a recession. He told American Public Media’s Marketplace that he’s worried about “factors beyond our control” — the Ukraine war, a slowdown in China, the ongoing pandemic.

At the same time, inflation has eroded Americans’ purchasing power: Prices have risen faster than hourly wages for 13 straight months. And the country’s savings rate, which skyrocketed in 2020 and 2021 when Americans deposited federal relief checks, has fallen below pre-pandemic levels.

Europe is even more prone to stagflation. Energy prices there have skyrocketed since Russia invaded Ukraine. Unemployment in the 27 EU countries is already at 6.2%.


For four decades, the United States has virtually banished inflation. By the early 1980s, Fed Chairman Paul Volcker had raised interest rates so high to fight inflation — 30-year mortgage rates approached a staggering 19% in 1981 — that he caused consecutive recessions in 1980 and 1981-82. But Volcker achieved his goal: He managed to free the economy from high inflation. And it stayed away.


“The Fed has worked hard since the stagflation of the late 1970s and early 1980s,” Zandi said, “to keep inflation and inflation expectations closer to their target,” which is now around 2%.

Other factors, including the rise of cheap manufacturing in China and other developing countries, kept the prices paid by consumers and businesses in check.

The United States has seen periods of high unemployment — it reached 10% after the Great Recession of 2007-2009 and 14.7% after the COVID-19 outbreak in 2020. But inflation remained contained until last year. In fact, the nation has not faced Zandi’s stagflation standard of 5% inflation and 5% unemployment for a year since 1990.


AP writer Fatima Hussein in Washington contributed to this report.

Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, transcribed or redistributed without permission. Concerns about stagflation, a flashback to the 1970s, begin to grow

Sarah Y. Kim

InternetCloning is an automatic aggregator of the all world’s media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials, please contact us by email – The content will be deleted within 24 hours.

Related Articles

Back to top button