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The 1970s Revisited?

A combination of surging consumer prices and public-sector labor strikes has understandably reawakened memories of the years preceding the recent era of persistently low inflation. It is now up to policymakers to manage the situation appropriately, even if it means telling voters what they do not want to hear.

LONDON – There has been much talk lately of a return to 1970s economic conditions. Here in the United Kingdom, year-on-year inflation reached 9.1% in May, and disruptive labor strikes are dominating the headlines.

But is a 1970s-style economy really in the offing? Much will depend on what happens with wage settlements and monetary and fiscal policy. And there are of course several global forces to consider, including COVID-19, China’s uncertain economic outlook, Russia’s war in Ukraine, and the parlous state of global economic and political governance generally.

With workers demanding higher wages, long-term inflation expectations have become a central issue. In early June, the University of Michigan’s closely watched inflation-expectations survey showed that respondents’ expectations of inflation over the next five years had risen sharply from 3% to 3.3%. This is worrisome, and it is a blow to those (like me) who have been arguing that the evidence for the medium- to long-term picture is still rather mixed. Other surveys (outside of financial markets) had suggested that the recent spikes in energy, food, and consumer prices were one-off events, rather than signs of genuine inflation.