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’70s inflation lessons wrong

Anybody who remembers the 1970s remembers the Great Inflation.

They probably also remember what happened next, when the Federal Reserve under Paul Volker tightened the money supply, driving down prices by driving down the economy, forcing two recessions that lowered consumer spending and increased unemployment.

For the last four decades, inflation has been not much more than a bad memory. This year, however, it has reappeared as a cause for concern. Fear of a return to 1970s-style inflation is driving calls for a retreat from the free-spending goals of the Biden administration, which some Republicans claim have overheated the economy.

They want Federal Reserve Chairman Jerome Powell to do what Volker did, and raise interest rates to cool demand. That would be a mistake.

The circumstances driving this economy are much different from those in the 1970s, and the kind of inflation then is not likely to come back.

Powell is right to reassure lenders that he’ll take action if inflation spirals out of control, but we are nowhere near that point. Reining in the economy too soon would unnecessarily hurt lower-wage workers at a point when the recovery is finally showing signs of reaching them.

Inflation is measured by the Department of Labor, which tracks over time the prices of goods and services it considers typical for an urban family. The department expresses the overall change in prices with the Consumer Price Index.

Earlier this month, the department reported that CPI has risen 5.4 percent over the previous 12 months, the greatest one-year increase since the period that ended in August 2008.

CPI is just one number, but that doesn’t mean that all prices increased equally. The 5.4 percent annual increase includes a 2.4 percent increase in food prices, 4.9 percent increase in apparel and a 24 percent increase in energy costs.

That is driven by a 45 percent increase in the cost of gasoline, which is what you might expect following 2020, a year when lockdowns and layoffs cut demand for gas.

This is very different from what happened to gas prices in the 1973-74, when an embargo by the Organization of Petroleum Exporting Countries cut off supply, driving up prices by 400 percent, bringing on a prolonged energy crisis.

Most prices are increasing moderately, as should be expected in an economy where people have pent-up demand and maybe some money that they didn’t spend last year.

As we saw during the pandemic with toilet paper, two-by-fours and chicken wings, small changes in behavior by large numbers of people can shock the system. But markets have an ability to respond.

We are still climbing out of a very unusual recession, and there are bound to be more surprises ahead. But like leisure suits, 1970s-style inflation is probably not making a comeback.

* Editorial from the Portland (Maine) Press Herald.

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