About the author: Joseph Brusuelas is chief economist of RSM US. His views do not represent the views of his employer.
Last July, I made the case in this magazine that a new form of stagflation, which I called stagflation lite, was on the horizon for the U.S. economy. Economic growth would slow as inflation rose due to a softening labor force, upward pressures on wage growth, and tariffs. Still, I wrote, “the prospect of galloping, 1970s-style inflation remains low.”
Plenty has changed since then. The White House has removed some tariffs and unveiled others. A new conflict has broken out in the Middle East, and a resulting 47% jump in domestic gasoline prices has reignited stagflationary fears of high inflation, high unemployment, and low growth.
But my outlook on the U.S. economy hasn’t changed. I still think that instead of a classic, 1970s-style stagflation, the economy will enter a challenging but manageable environment of stagflation lite.
The economy is better equipped to weather the current energy supply shock than in the 1970s. The oil intensity of U.S. gross domestic product, defined by the quantity of oil consumed per unit of economic output, has declined by 70% since the oil shocks of the 1970s. The rise of alternatives to fossil fuels, as well as the vastly improved fuel efficiency in autos, have reduced exposure to energy-supply shocks, while the invention of fracking and the expansion of domestic oil and natural gas output has given the U.S. a level of energy security that didn’t exist 50 years ago.
Economic growth may slow below the long-term trend of 1.8% and inflation may head above 4% this summer or fall, but unemployment will likely stay below 5%. That is because changing demographics, such as retiring baby boomers and tight immigration policies, will continue to keep a lid on the number of workers looking for work.
Instead of the oil shock setting off galloping price increases across the economy like in the 1970s, a milder form of inflation will set in. We are already starting to see this. April’s consumer price index reflected inflation at 3.3% on an annual basis—the highest since 2024, but nowhere near the 13% inflation rate of 1979.
Still, one doesn’t have to be very imaginative to think that with the midterm elections approaching, politicians will start calling for 1970s-style price and export controls to dampen war-related price hikes. Several Democrats in Congress are already pushing for bans or caps on oil and gas exports. Sen. Josh Hawley (R., Mo.) is likely to propose legislation to suspend the 18 cent-per-gallon federal gas tax this week. President Donald Trump endorsed that idea Monday.
But these measures would result in domestic shortages, rising prices, and higher inflation, just as the price and wage caps and crude export restrictions of the 1970s did. Economists now broadly agree those measures did more to hurt the economy than help.
Should the Iran war continue into the summer and fall, energy prices will rise far above their already elevated levels, pressuring inflation even further upward. Even with stagflation lite is setting in—dampening consumer and corporate sentiment—this is no time to revisit the misguided interventions and policy choices of the 1970s.
Instead, politicians should focus on finding a diplomatic solution to quickly reopen the Strait of Hormuz. That is the only way to put the U.S. and global economy back on a path to price stability, strong growth, and maximum employment.
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