PremiumThe bad news is that the worriers might be right that macroeconomic policy is too loose, posing too great a risk of high inflation. Here, though, let’s linger on the good news, which is that reliving the 1970s remains unlikely
Inflation exceeded 5% a year each year from 1973 to 1982. It hit double digits for three years in a row from 1979 to 1981. The US hasn’t seen such rapid price increases since then. But a recent spike in prices, coupled with large budget deficits and a Federal Reserve aiming for higher inflation, has brought forth worries that the bad old days might be here again.
When the Consumer Price Index came in 4.2% higher in April than it had been the previous year, Republicans declared that President Joe Biden was repeating Jimmy Carter’s record. While market fears of inflation have receded a bit since then, not a day goes by without someone sounding an alarm.
The economist Stephen Roach, who worked at the Federal Reserve in the 1970s, writes that there are “haunting similarities" between that period and our own. “A return to 1970s-style inflation is only a broken supply chain away," he warned in the Financial Times. Lawrence Summers, the former Treasury secretary, has been reminding fellow Democrats that the Great Inflation of 1966 to 1982 was a time of conservative electoral gains.
The bad news is that the worriers might be right that macroeconomic policy is too loose, posing too great a risk of high inflation. Here, though, let’s linger on the good news, which is that reliving the 1970s remains unlikely.
Start by considering how far the U.S. would have to go to get there. The CPI has risen by an average 2.2% during the last three calendar years. One measure of market expectations of inflation — the difference in yields between Treasury bonds that are indexed for inflation and those that are not — puts it at lower than 3%, on average, for the next five years, and for the five after that. Those are numbers that would have been considered blissfully low even in the late 1980s, after the Federal Reserve had ended the Great Inflation.
Discussions of inflation sometimes emphasize that it can get out of hand quickly. That’s true in principle, but it’s not what happened from 1966 to 1982. After hitting 3% in 1966, it took until 1969 to exceed 5%. Double digits came in 1974. Expectations of inflation rose slowly, too, not really spiking until 1973. Policymakers had plenty of time to arrest the trend of rising inflation.
Looking at some of the reasons they didn’t offers hope that this time will go differently. The prevailing climate of thought in the 1960s tended, as Milton Friedman later explained, to downplay the idea that excessive growth in the money supply caused inflation.
Arthur Burns, the chairman of the Federal Reserve Board for most of the 1970s, thought that inflationary pressure was inevitable in a modern economy and that wage and price controls would counteract it better than monetary restraint. Friedman did more than anyone to overthrow such ideas, but the intellectual shift was gradual and required some hard experience to take hold. Now, by contrast, nobody doubts that the Fed can arrest inflation and almost nobody thinks that Congress should take the primary role in stopping it instead.
There were other, more technical reasons the Fed erred in the 1970s. It frequently overestimated the economy’s potential output and therefore wrongly assumed that more stimulus was needed to reach that potential. Similarly, it underestimated the level of structural unemployment, and so concluded that the economy had room for more job growth with smaller wage increases than it actually did.
Today’s Fed also wants low unemployment and a small output gap. But it now takes the view that the best way to promote these goals in the long term is to hit an average inflation target rather than attempt to influence those variables directly. Having the wrong estimates of potential output and structural unemployment is thus less likely to lead it to set the wrong policy.
Another advantage over the 1970s is the inflation-indexed bonds mentioned earlier. They don’t present a perfect picture of market expectations of inflation. (At the moment, they may be exaggerating them.) But the daily movements of that market provide a better, and more up-to-the-minute, sense of those expectations than were available during the Great Inflation. If they are becoming unanchored, we will find out faster than we did back then — and if the Fed then takes action to fend off inflation, it will be able to see faster, too, if it is succeeding in bringing expectations back down.
Inflation, in short, is likely to rise. Will that mean above-5% inflation for several years, as in the 1970s? Bell bottoms are more likely to come back.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ramesh Ponnuru is a Bloomberg Opinion columnist. He is a senior editor at National Review and a visiting fellow at the American Enterprise Institute.
