NOT YOUR (GRAND) PARENT'S STAGFLATION
It’s beginning to look like the global economy is slipping into stagflation: low/negative growth, high inflation. This is going to be quite different than the 1978-1983 stagflation you’ve read about. I remember the last episode well, because it was early in my career. While there are similarities to our current situation, there are a lot of differences too. At least for now.
- First, inflation was a lot higher back then. Fed Chairman Volker was probably ecstatic to see 4% inflation in 1983 when he began easing. In 1979, when he began tightening, inflation was over 12% and we hadn’t seen 4% inflation for 6 years. Today, inflation is around 4% to 5% and everyone is worried.
- Second, during the late ‘70s/early ‘80s, inflation expectations exceeded realized inflation as people extrapolated the present exponentially into the future. Labor costs rose accordingly, with 10% cost of living (COLA) raises considered routine. Today, long-term expectations are generally lower than realized inflation.
- Finally, the inflation of the previous era was not due to supply chain shortages, but instead an increase in the money supply, likely caused by mismanagement at the Fed in the pre-Volker years. In the late 1970s, there was no shortage of goods and services. Toilet paper was in ample supply but so was money, resulting in inflation.
As of this writing, the type of misery caused by 1970s stagflation has yet to manifest itself. Labor costs are rising, not because of COLA increases, but because of strong demand for labor due to robust growth. Monetary and fiscal stimulus have increased money supply but have not yet manifest in higher inflation, although it could in the future. Another troubling development is the rise in oil prices. A similar rise occurred in 1979 and was a prime contributor to slower growth.
For these reasons, it remains likely that today’s stagflation, if that’s what we’re experiencing, is a lighter version than the one your parents or grandparents remember. At least let’s hope so.
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