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What the Inflation of the 1970s Can Teach Us Today | WSJ - YouTube
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- Everyone is talking about inflation.
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- Inflation.
- Inflation.
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- Inflation.
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- [Narrator] It's the word that's been
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on everyone's lips lately
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and some are looking back at history.
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- In fact, we've not heard
inflation talked this much
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since really the 1970s.
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- [Narrator] That's because
over the past few months,
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prices for everything from gasoline
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to groceries have been rising sharply
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as the economy roars back
from the pandemic recession.
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This graph charts the
consumer price index,
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a metric that measures the
average change in prices
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for consumer goods and services compared
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to a year ago, or more
simply put, inflation.
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In May of this year, prices spiked 5%
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to reach the highest annual inflation rate
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in nearly 13 years.
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Many economists believe
that a small amount
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of inflation, around 2%, is inevitable
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and even desirable.
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That's essentially what we've
had for the past 15 years
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before this most recent surge.
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But these recent increases
have some fearing
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that the US might be returning
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to the runaway inflation of the 1970s.
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- No one wants to see that happen again.
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- [Narrator] So are we returning
to the spiraling inflation
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of the late 1960s and 1970s?
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Or is today's inflation, as
the Fed assures us, transitory?
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- This is an extraordinarily unusual time.
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(dramatic music)
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- [Narrator] For those
old enough to remember it,
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the Great Inflation was a period
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in which the cost of living
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for millions of Americans soared.
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From 1965 to 1982,
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prices for food and
everyday consumer items
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rose dramatically from 2%
in 1962 to 15% in 1979.
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During that same period,
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unemployment also rose steadily,
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eventually reaching just above 10%.
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The term stagflation,
an economic condition
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of both rising inflation
and increasing unemployment,
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became the go-to phrase
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to describe the period's economic malaise.
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This was a time when consumers
protested rising meat prices,
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unions members picketed for
cost of living pay increases
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and long lines for unemployment
and gas became commonplace.
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- [Reporter] Here in New Jersey,
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10% of the workforce is unemployed.
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Across the nation, the average is 8%.
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- The main lesson from the '70s
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is that kind of nagging, persistent,
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recurring double-digit inflation
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doesn't happen overnight.
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It sets in over many years
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and it's set in because of a long series
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of policy mistakes in Washington.
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(pensive music)
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- [Narrator] Great Inflation has its roots
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in the government spending of the 1960s.
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Consumer prices began rising
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under President Johnson
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as he escalated the Vietnam War
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and launched his Great
Society social programs.
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But the double-digit inflation
the period is famous for
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didn't begin until President
Richard Nixon took office.
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- The time has come for
a new economic policy
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for the United States.
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- [Narrator] In 1971, Nixon ordered
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that the dollar would no
longer be backed by gold.
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- Inflation robs every
American, every one of you.
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- [Narrator] Nixon also influenced
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the Fed's monetary policy,
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pushing the central bank
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to pump more money into the economy
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and keep interest rates low.
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- By letting inflation rise gradually
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for a number of years,
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the Fed compromised the
trust the public held
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that the Fed would
maintain price stability.
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Businesses and households
started expecting
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that inflation would persist.
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- As prices went up,
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workers started pressing,
in part for unions.
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As wages went up,
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companies started raising prices even more
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and we got this game of leap frog
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where prices and wages both went up.
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- We must whip inflation right now.
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- [Narrator] These
policy missteps continued
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under President Ford
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and later under President Carter.
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The issue was exacerbated further
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by OPEC's oil embargoes.
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- A more serious domestic problem,
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that problem is inflation.
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- [Narrator] It wouldn't be
until President Jimmy Carter
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appointed Paul Volcker as the Chairman
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of the Federal Reserve
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that the Great Inflation
finally began to disappear.
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- Paul Volcker, the Fed Chairman,
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said I'm gonna stop this cycle
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and he clamped down on the money supply,
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jacked up interest rates.
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It caused two very severe recessions
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but that, it turned out to be,
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really what needed to happen
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to get inflation under control.
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- [Narrator] Volcker's inflation crackdown
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represented a new chapter for
America's monetary policy.
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- The 1960s and 1970s,
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the Fed did not have
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an articulated inflation
targeting strategy
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that inflation should be around 2%.
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And so they were not focused
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on keeping inflation under control.
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- In the 1970s, the Fed
was not even willing
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to commit to what they
meant by price stability.
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It was kind of trust us,
trust us, we will deliver,
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which is a horrible policy.
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(playful music)
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- [Narrator] Today, we can
see some clear similarities
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between our modern inflationary period
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and that of the 1970s.
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Just like the '70s, prices are rising.
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The Federal Reserve has
increased the money supply
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and government spending is up.
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But comparing today's inflation
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with that of the entire Great Inflation,
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especially the 1970s, is not accurate.
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- I graduated from college in 1975.
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I had a front row seat.
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I don't expect anything
like that to happen.
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- Today's inflation and
the threat that we have
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is actually like the
last half of the 1960s.
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It's not like the 1970s.
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In the mid-1960s, inflation
had been running about 2%.
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By the end of the 1960s,
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inflation went to about 5%.
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The last inflation reading
we had was still below 5%
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and so you're nowhere near 20%,
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which was the highest inflation reading
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at the end of the 1970s.
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There's almost no period in the 1970s
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that had its inflation
as low as we have now.
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- Some of the recent spikes in inflation
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are a very healthy sign of the recovery.
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What we experienced
last year wasn't normal.
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Take airfares in the airline industry.
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We have this dramatic drop of airfares.
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That was a sign of the risk
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that the whole industry would collapse.
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It's a healthy sign that we see a reversal
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of those increases today.
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- [Narrator] For their part,
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the Fed says it remains committed
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to its long-held stance
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that today's inflation is temporary.
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- The Fed believes that what
happened is supply shock.
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And so that's causing shortages
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and temporary price increases.
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That's the Fed's theory.
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- What we're seeing now,
we believe is inflation
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in particular categories
of goods and services
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that are being directly affected
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by this unique historical event
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that none of us has lived through before
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called reopening the
economy after closing it.
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- Every time we have an economic recovery
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from a recession, we expect
to see inflation rise
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above 2% for a while.
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That's normal.
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- If it turns out that these impacts
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are more than transitory,
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if they're lasting, they
persist or even increase,
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then the Fed might have to
do something to stop it.
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- [Narrator] On June 16th,
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Federal Reserve officials signaled
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that they expect to raise interest rates
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by late 2023, sooner than
they anticipated in March.
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(pensive music)
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