Will Stagflation Return To The U.S.?

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Published 2022-05-02
Central bankers are tightening the U.S. economy as inflation takes hold in historic fashion. Meanwhile, the unexpected shock of war in Ukraine is slowing global growth. Experts say the moment recalls the "Great Inflation" of the 1970s and 80s. This period is remembered for stagflation, which describes the dual-threat of stagnant growth and persistent inflation. Today's Federal Reserve leaders hope to avoid such a dramatic turn of events. But their plan could backfire, as many root causes of inflation are outside of the bank's control.

The Federal Reserve is hiking interest rates in an effort to defuse an explosive year of price inflation. But global forces could neutralize the effects of that tightening of monetary policy, and keep inflation high.

Some observers believe the U.S. government may have misread the looming threat of inflation. During the pandemic, Uncle Sam dispersed historic sums of cash to blunt widespread economic damage. Analysts say this stimulus produced strong household savings. A boom in demand for durable goods followed.

This surge in demand came as global supply chains stalled out, and a persistent bout of inflation followed. In March 2022, prices across all categories rose to historic levels, 8.5% year over year. And investors believe the price hikes aren’t over yet, according to a New York Federal Reserve survey.

“The only way to break the back of inflation that’s running out of control is for very tight monetary policy, ” says Richard Fisher, former President of the Federal Reserve Bank of Dallas. “It slows things down because everything becomes expensive.”

Today’s inflation isn’t spiraling in the way it did in the recent past, however. From 1965 to 1982, inflation soared, at times reaching double-digit rates. In 1979, the central bank, under Chair Paul Volcker, kicked off a tightening cycle that resulted in interest rates of nearly 20%.

Strong monetary policies killed inflation, but also led companies to offshore labor costs. As a result, American workers saw their labor income stagnate relative to productivity for four decades.

This period in U.S. economic history is remembered for stagflation, which describes the duel threat of stagnant growth and persistent inflation.

Today’s Federal Reserve leaders hope to avoid such a dramatic turn of events. But their plan could backfire, as many of the root causes of inflation are outside of the bank’s control.

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Will Stagflation Return To The U.S.?

All Comments (21)
  • Chris Steven
    You may not have noticed inflation in years past, But 8%+ inflation over the past year should've taught you that the cost of living increases every year (home prices, rent, groceries, plane tickets, home repairs, etc.) Only way to beat inflation is by investing your money
  • Alice Martin
    Successful people don't become that way overnight. What most people see at a glance- wealth, a great career, purpose-is the result of hard work and hustle over time. I pray that anyone who reads this will be successful in life..
  • Archer
    Anyone with basic economic common sense knew in 2020 that printing trillions of dollars and pumping them into the economy was going to result in high inflation. When you flood the economy with currency, the value of each unit of currency falls.
  • Mona Harper
    I will forever be indebted to you ??you’ve changed my whole life I’ll continue to preach about your name for the world to hear you’ve saved me from a huge financial debt with just little investment thanks so much Mrs Kathy Boyce Johnson
  • I love how some people talk about inflation like it's something that came from thin air, when in fact it''s 100% Government made. In reality, inflation is a tax that the Government puts on your savings, if you have any. I used to think that conspiracy theories are silly fiction stories, but now i realize that reality is worse.
  • Daniel Sifrit
    Inflation is only "healthy" when wages are also growing in time with it.

    My salary has been flat even IGNORING inflation for 12 years now. It peaked 15 years ago and then fell for a few years (when outsourcing ran rampant) and now it has stabilized fairly close to what I made 20 years ago. Ignoring inflation, mind you. (I make my 20 years ago salary, today, in 2022 dollars)

    Fortunately I bought my condo in 2008 dollars, so my housing costs have been mostly stable. I feel for all the people trying to RENT in this economy, those rates are almost twice what they were 12 years ago. My last apartment before I bought was $1400/mo - that EXACT SAME unit is $2300 today.
  • ezra limm
    It's not stagflation - it's textbook inflation. Money supply grew without a corresponding rise in productivity - hence money became more worthless. This is the textbook definition of inflation.
  • _
    Odd how wages didn't change since the initial backbreaking effort to get things in line and now we're back here again. Phrasing it as in 4 decades obfuscates just how little has been done on a federal level since the 1970's if all it took was a decade. Farcical, a government unconcerned with supporting its people will soon find them unwilling to support it in turn.
  • Caroline Johnson
    Professional investors are growing increasingly gloomy about the future, with the majority now predicting that stocks will fall into a bear market this year and the U.S. economy will be plagued by stagflation—meaning high inflation and slow economic growth—according to Bank of America’s latest Global Fund Manager Survey.
  • Supernova
    Phenomenal presentation on the issue of stagflation. Thanks!
  • kage
    this reminds me of the phrase, “centrally-planned economy.”
  • Miguel Saucedo
    We need federal interest rates to increase to over 30% to bring down a 200% inflation of meat, 300% inflation in fruits, and 300% inflation in housing.
  • Kyle Wicklund
    Fed can’t even raise interest rates through an OMP because of the ample reserves position that we are in. So by increasing the IOER to reach the new fed target rate just going to cause a massive contraction in the money supply and ultimately lead to a recession.
  • ShakespeareCafe
    The last refuge for low skilled workers—Amazon warehouse, door dash and Uber drivers—will be greatly affected as Americans contract their spending.
  • Jay Bartgis
    "The 1970s were some of the worst times in history" pfff. I'm at a complete loss trying to figure out how paying for your university tuition and board with a part time summer job is hard.
  • The Momaw
    Sad that the "how to you survive this as a normal person" section was utterly useless. I can't afford a house, my investments are going down in value, and at this point I pretty sure I am working a full time job in exchange for negative income. Is it time to eat the rich yet?
  • dragonore2009
    Well of course the fed should raise interest rates like Paul Volcker did to combat inflation. Will they? Well of course not, they can't. Now raising rates like this, will cause a recession a severe one, and will cause mass unemployment, but it is needed. I too will likely face unemployment if the fed does that, but they won't.
  • Ajax Sid
    In India we went through the same phase in the 1990s due to foreign oil hikes. Our then finance Minister Dr Manmohan Singh, took a major loan and did Stagflation.
  • Peter Jonas Eckel
    It would be nice if you showed the total union membership figures for the American workforce across its entire history. Thank you for the presentation.