What is stagflation? Fears are rising that the U.S. economy is headed for a 1970s-style death spiral

March 11, 2022, 3:13 AM UTC
Updated March 15, 2022, 1:47 PM UTC

Consumer inflation jumped nearly 8% in February over last year—the sharpest spike since 1982, the Labor Department reported Thursday, citing a report that didn’t include the oil and gas-price surges following Russia’s invasion of Ukraine.

Some worry the conditions amount to a perfect storm, reminiscent of the “stagflation” dynamic that made the economy of the 1970s miserable for many Americans.

It’s the buzzword of the week, with U.S. Google searches for the term exploding to quadruple what they were two weeks ago—and what they were for most of the past year.

What is stagflation?

It’s a combination of economic stagnation and high inflation, with the added struggle of increased unemployment, Veronika Dolar, an economist at State University of New York at Old Westbury and visiting professor at Stony Brook University in New York City, told The Conversation.

Typically, economists focus on “three big macroeconomic variables,” she said—gross domestic product, unemployment, and inflation.

“Each measure tells its own important story about how the economy is doing,” Dolar said. “GDP—or the total output of all goods and services produced—shows us what the broader economy is doing, unemployment tells us about the job situation, and inflation measures the movement of prices.”

She continued: “But their stories also overlap. And unfortunately, they usually don’t all tell us good news at the same time.”

It’s not uncommon to see a strong GDP with low unemployment counterbalanced by higher inflation—or lower inflation with lower GDP and, perhaps, higher unemployment, Dolar added.

“So, normally there is some good news and some bad news. But with stagflation, there is no good news,” she said.

Have we been here before?

Yes. You may be hearing a lot about stagflation in the 1970s U.S., when energy prices skyrocketed due to an embargo led by OPEC, resulting in crude prices doubling from 1973 to 1975. This led to high inflation and recession for countries that imported large amounts of oil, Dolar said.

Known as the Oil Shock of 1973-1974, the economic crisis occurred when the complicated macroeconomic environment of the early 1970s collided with an oil embargo by Arab producers against the U.S., Michael Corbett of the Federal Reserve Bank of Boston wrote in Federal Reserve History.

And then it happened again, a few years later, during the Oil Shock of 1978-1979, Laurel Graefe of the Federal Reserve Bank of Atlanta wrote—set off by the Iranian Revolution in early 1978 and a subsequent decline in the country’s oil output of nearly 5 million barrels per day. These events, combined with “widespread speculative hoarding,” lead to oil prices more than doubling from April 1979 to April 1980.

Stagflation “fundamentally altered Americans’ way of life and ushered in an era of fuel conservation and rationing not seen since World War II,” Dolar said.

Case in point: On Jan. 2, 1974, President Richard Nixon signed the Emergency Highway Energy Conservation Act, which set a new national maximum speed limit at a fuel-efficient 55 mph. It stayed in effect until 1995, when it was repealed by Congress.

So, are we there yet?

No, thankfully.

As a recent Bloomberg report put it, “The world economy has a decent shot at escaping a full re-run of 1970s-style stagflation—and that’s about as far as the good news goes.”

Laura Rosner-Warburton, senior economist at consulting company MacroPolicy Perspectives, suggested that a key question in coming months will be whether higher gasoline costs seep into the broader economy by escalating costs for items like shipping and airline tickets. Such core price increases usually take longer to fade than volatile energy costs do.

Most economists, though, say they think the U.S. economy is growing enough that another recession is unlikely.

Fingers crossed.

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