Could the 1970s Inflation Happen Again? - YouTube

In the 1970s, the U.S. saw some of the  highest rates of inflation in recent history,  

with the inflation rate reaching double  digits. The great inflation of the 1970s began  

in late 1972 and lasted all the way to the early  1980’s. It was a huge disaster caused by the  

sudden rise of oil prices and heavy government  spending that led to severe unemployment,  

with interest rates rising to nearly 20%, a number  that sounds absurd to most people right now. 

Meanwhile in 2022, commodity prices are surging  due to the recent conflict between Russia  

and Ukraine. And this happens right when the  economy has just reopened after being hit by  

the global pandemic following periods of massive  quantitative easing policies, leading to inflation  

surging to 6% over the 12 months through January  2022, far above the Fed’s target of 2 percent. 

From this oversimplified explanation, we  can already see two concerning similarities.  

First, the supply chain disruptions caused  by the pandemic and the supply shocks caused  

by the conflict in Ukraine closely  resemble the two oil shocks in 1973  

and 1979. And the easy monetary policy which was  used to stimulate the economy during the pandemic  

resembled the excessive government spending  and debt creation in the early 1970s. 

The main concern is that  as inflation remains high,  

the Fed and central banks  worldwide will once again  

need to undertake a much more forceful policy  response than anticipated to bring down inflation.  

Like what Paul Volcker did when he raised the  federal funds rate to 20% in 1979, which did  

work really well to curb inflation but ended  up causing a painful recession in the process. 

So, what is going on here? There is a lot of  concern about inflation right now and comparing  

it to the dark days of the 1970s probably makes it  even worse. But before we jump to conclusions that  

inflation will not be contained or we are heading  into a recession. It’s best to examine both the  

1970s and today’s inflation and understand the  similarities and the differences between the two.  

There’s much that we can learn from  this, so let’s get started right away. 

Okay, so I briefly explained the  cause of the 1970’s inflation,  

which was the two oil shocks in 1973 and 1979. But  prices actually started creeping up in the 1960s  

when the federal government was spending heavily  on the Vietnam War and the Great Society program.  

The latter specifically brought about major  spending programs when the U.S. fiscal situation  

was already being strained by the war. So much  so that it required breaking the dollar’s link  

to gold, because the claims of gold that were  being turned in were far more than the amount  

of gold available. This prompted up the amount of  money and credit that fueled the 1970s inflation. 

And while the two oil crises were the most  significant shocks during the 1970s, all kinds  

of commodities, from oil and coal to agricultural  crop prices were rising rapidly during the 1970s.  

For instance, the price of grain spiked in part  because of a massive drought in the Soviet Union  

in 1972, which greatly reduced its food output,  and led it to purchase the U.S.’s entire wheat  

reserves, and pushed up food prices worldwide. The combination of high inflation with weak  

economic growth and high unemployment, fueled  by repeated supply shocks, created a situation  

known as stagflation. And it all compounded  into the dark days that people are terrified of,  

especially now that many believe it is going to  happen again. But before we jump to conclusions,  

let’s talk about what is happening right now. Inflation has risen over the past year from less  

than 2% to over 6%, the highest level  since 2008. And it is now running way  

above the central bank’s inflation target in  almost all advanced economies. In particular,  

the commodity price surge caused by the  conflict between Russia and Ukraine is  

especially concerning as it poses a huge challenge  for the Fed and central banks around the world. 

Even before the invasion, the PCE price index  (an important measure for the Fed) averaged  

5.8 percent over the 12 months until December  2021, the highest rate we’ve seen since 1982.  

This surge in prices was contributed by  several major sectors. Both energy and vehicle  

each accounted for about one-quarter of the 4%  increase in inflation. The higher energy prices  

greatly increased inflation but aren’t really that  unusual, oil is always volatile, and oil prices  

were pretty low in 2020 because of the pandemic.  But the price increase of vehicles was unexpected,  

because this is a sector that doesn’t  have volatile prices like commodities. 

But then again, vehicles have been  in short supply since last year,  

mainly caused by the semiconductor shortages  around the world. Supply chain disruptions  

along with strong demand were also the cause of  inflation in other vital sectors. For example,  

non-energy services (which encompasses about 60 to  70% of all consumer spending, added 0.8 percentage  

points to the 2021 increase in inflation. But,  more than half of this increase was caused by the  

economy opening up again after the lockdown, as  in 2020 the prices of airline tickets and travel  

accommodations plummeted among others. In order to combat this situation,  

the Fed has begun steadily increasing interest  rates. It increased the fed funds rate by a  

quarter in March and is expected to  increase it by half a point in May  

and June. And the financial markets also expected  the European Central Bank to do the same thing. 

Now, we haven’t even touched on the  most important part of the story yet,  

the invasion. The main impact of the war on  inflation will be through higher commodity  

prices and even worse supply-chain disruptions.  Russia and Ukraine are major exporters of many  

commodities like oil, natural gas, wheat,  nickel, and many more. Supply shortages,  

shipping disruptions, and firms withdrawing from  Russia will raise commodity prices even more,  

on top of the price increase from the pandemic. If supply disruptions continue and commodity  

prices rise up even more. Then inflation may stay  at the rate it is now or even continues to rise,  

which may force the Fed to raise interest  rates even more to combat the inflation.  

Possibly triggering a hard landing like  in the 1970s, with the possibility of  

a recession and rising unemployment. But of course, today’s situation and  

the situation in the 1970s are much different. So,  we also need to look at the differences. One piece  

of good news is that the magnitude of commodity  price jumps has been smaller than in the 1970s,  

at least at the time I’m making this video. During  the 1970s, oil prices quadrupled in 1973 and then  

doubled in 1979. Today, oil prices in real terms  are still far lower than in the 1970s or 2008. 

Another difference between today and the 1970s  is that for now, increases in inflation have been  

concentrated narrowly in a few energy-intensive  and pandemic-affected sectors. In contrast,  

inflation in the 1970s was broad-based, affecting  virtually all sectors in the economy with  

similarly high inflation rates. This means that  there is still hope that inflation will decline,  

especially in non-volatile sectors like vehicles,  as supply disruptions ease and production expands. 

Again this is a developing situation, so it might  not be that way when you’re watching this video,  

especially as there is a possibility that  inflation will broaden across sectors and  

commodity prices will increase even more. So, is this something to worry about? In  

my humble opinion... yes. There are a lot of  concerns about inflation and economic slowdown,  

and the Fed’s raising interest rates  will eventually slow the economy.  

Global supply chain pressures might continue to  intensify more than the Fed’s projections. And  

there’s a considerable amount of uncertainty  about the effects of the invasion of Ukraine  

that could continue to raise energy prices with  spillover effects on other prices. The question is  

whether a small increase in interest rates will  be enough to contain inflation, or prices will  

rise more than expected, and in turn, central  banks need to raise interest rates even more,  

with the possibility of an economic recession. If you liked this video, you might enjoy my video  

on how the mafia operates in the legal economy.  Where I explain about criminal organizations and  

how they use legal businesses to gain power and  profits. This is Doverhill, and see you next time.