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Not That Seventies Inflation

Summary:
In contrast to the stagflationary 1970s, the US recovery since the pandemic-induced recession has been strong, whether judged by GDP or labor-market indicators. Today’s economic conditions therefore recall the late 1960s, another time of rapid growth and moderately rising inflation. CAMBRIDGE – Are the United States and other advanced economies experiencing stagflation, the unfortunate combination of high inflation and low growth in output and employment that characterized the mid-1970s? At least in America’s case, the answer is no. What the US is facing now is moderate inflation, without the stagnation part. That recalls the 1960s, not the decade that followed. Whipping Up America's Inflation

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In contrast to the stagflationary 1970s, the US recovery since the pandemic-induced recession has been strong, whether judged by GDP or labor-market indicators. Today’s economic conditions therefore recall the late 1960s, another time of rapid growth and moderately rising inflation.

CAMBRIDGE – Are the United States and other advanced economies experiencing stagflation, the unfortunate combination of high inflation and low growth in output and employment that characterized the mid-1970s? At least in America’s case, the answer is no. What the US is facing now is moderate inflation, without the stagnation part. That recalls the 1960s, not the decade that followed.

True, US headline consumer price inflation rose to an unexpected 6.2% in the year to October, the highest rate since 1991. Few still forecast an early return to 2% inflation, the US Federal Reserve’s long-run target. Inflation is also running at ten-year highs in the United Kingdom (4.2%) and the European Union (4.4%), though it remains low in Japan.

In contrast to the stagflationary 1970s, however, the US recovery since the pandemic-induced recession of 2020 has been strong, judged by GDP and labor-market indicators. Rising demand for goods is confronting supply constraints, including port bottlenecks and chip shortages, resulting in price inflation. Meanwhile, rising demand for labor is encountering a supply of labor limited by the lingering effects of the pandemic. This has resulted in wage inflation.

The US unemployment rate fell from 14.8% in April 2020 to 4.6% in October 2021, which would have been considered close to full employment during most of the last half-century. By contrast, unemployment reached 9% in stagflationary May 1975. Other current indicators point to an even tighter labor market today: the ratio of job vacancies to unemployed workers is the highest on record, as is the quit rate.

Jeffrey Frankel
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

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