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Not That Seventies Inflation

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.