Why Today’s Inflation is Not a Repeat of the 1970s
Why Today’s Inflation is Not a Repeat of the 1970s
Posted November 1, 2022 by Ben Carlson
I’m not a huge fan of the Federal Reserve’s current policy choices. LINK
They obviously had to do something about the persistently high inflation but I think they run the risk of overdoing it. The magnitude of their interest rate hikes increases the risk of something breaking in the financial system. LINK
The Fed is in a tough spot because they acted too late but also because they don’t want inflation to get so bad that it causes them to bring the hammer down even harder in the future.
One of the biggest reasons the Fed is going so hard in the paint here is because they don’t want a repeat of the 1970s where inflation remained persistently high for the entire decade.
Jerome Powell said as much to the House Financial Services Committee when he commented that the 1970s situation is, “What we’re trying not to replicate.”
Treasury Secretary Janet Yellen said something similar: “I came of age and studied economics in the 1970s and I remember what that terrible period was like. No one wants to see that happen again.”
From 1970-1981, the average inflation rate in the United States was nearly 8% per year. In that period there were four recessions, with the final downturn providing the death blow to the inflationary beast.
I don’t agree with the idea that we are setting up for a repeat of the 1970s but there are some similarities.
Both periods saw loads of government spending and an increase in the money supply. Both periods experienced food and energy shortages. And both periods came with rapid wage growth.
The wage growth is probably the thing the Fed is most worried about. After all, one person’s income is another person’s spending.
If we compare the change in average hourly earnings to total inflation by decade you can see there is a strong relationship between wages and prices:
To continue reading, please go to the original article here:
https://awealthofcommonsense.com/2022/11/why-todays-inflation-is-not-a-repeat-of-the-1970s/