December 29, 2021

Today’s Inflation Is (And Isn’t) Reminiscent of the 1970s

Written by: HUDSONPOINT Team
Stock Market

inflation rate 2021Inflation recently hit a 40-year high, as further evidenced by rising prices for fuel and everyday consumer goods. The year ending October 2021’s rising inflation rate isn’t only dominating headlines, but the predictions of economists wondering if history is on track to repeat itself, reaching levels like the nation saw in the 1970s.


What the future will hold is at this point unknown, and we are resigned to making educated predictions. While some look towards free federal stimulus money and an increase in the money supply as primary causes, economists also point to similarities with current inflation and that of the 1970s. We’ll take a deep dive into their predictions and explain why, despite analysis, history is unlikely to repeat itself.



A Look at Inflation in the 1970s

In the late 1960s and throughout the 1970s, under Nixon’s presidency and later Carter’s, inflation rose dramatically. According to the US Bureau of Labor Statistics, in 1968, inflation was on the rise but yet to hit 5%.


In 1969 and 1970, the price increases were at 6.1% and 5.5%, respectively. In the early 1970s, Nixon used his authority to freeze prices and wages, which kept inflation at bay until those policies ended in 1973. Then, price increases took off in 1973 and ‘74, when the 12-month change in the all-items index reached 12% in September of ‘74.


From 1969 to 1981, gas prices quadrupled, and, in 1973, food inflation also rose to over 20% at its top level. Unemployment rates increased dramatically. Inflation continued to rise and reached its peak in 1980 at a rate of over 13%. The decade from 1969 to 1980 is a prime example of an inflation crisis, and the all-items CPI (Consumer Price Index) didn’t find its way back to less than 5% until 1982.


Today’s Inflation Fears and How They Compare

Now let’s move on to today’s economy and the current inflation trends. Now that you have some understanding of a past inflation crisis, what about today’s trends are concerning to economists?


According to The New York Times, the attention has focused on the recent CPI rise of 6.8% in November, the biggest rise since 1982 and carrying inflation to a 40-year high. Intense consumer demand coupled with rising housing costs fueled this pace, and monthly price increases between the months of October and November, despite some moderation, still rose unusually fast.


In a recent interview with CBC Canada, David Laidler, an economist during the 1970s, asserted that the current rising costs of goods, such as lumbar and metal, coupled with decreased availability of good workers make it possible for a situation like the 1970s to happen again. He also noted that the inflation crisis took people by surprise back then, and as prices increased, people wrote them off as exceptions, not the rule.


The current rise in inflation puts pressure on the Biden administration, as the rates only recently began to rise over the last year. They say this sharp jump in inflation is concerning for the Federal Reserve as well as the Biden administration, who is receiving pressure to reverse this dilemma.


Despite the month-to-month increases in the CPI this year, federal officials are reassuring the public that this inflation is only temporary, a result of the pandemic, and that it should reverse. However, inflation is lasting longer than expected and is also expanding to areas less affected by the pandemic, like rental costs for housing, leaving some federal officials to believe that these unprecedented gains are here to stay. Calculating new monetary policy has proven more difficult than expected.


How Inflation Affects the Economy

People across the nation have likely felt the effects of this inflationary pressure on an everyday basis. The new and used car market has jumped in cost and demand, with the BLS reporting a 26% price increase in used cars over the past year.


According to the BLS, the price of fuel oil jumped 59% over the past year, and the cost of motor fuel rose by 50%. Categories such as furniture, meat, eggs, hotel fares, and even televisions saw rises of over 10%.


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Price Expectations and Inflation-Indexed Bonds Show Hope

There are a number of factors to consider when looking at whether this quick inflation rise will cause another 1970s fiasco. Some encouraging factors come into play now compared to back then that provide some hope that history may indeed not repeat. According to the New York Times, Richard Clarida of the Federal Reserve states that the main measures for price expectations are not in a danger zone at this point.


According to Mint, the inflation-indexed bonds are encouraging. These compare the yields from Treasury bonds indexed for inflation and those that aren’t indexed for inflation. Mint reported that these show a prediction of less than a 3% average difference over the next 10 years, which is quite low.


However, the New York Times’ most recent report noted a jump to 3.1% predicted, which they found concerning, as compared to the much lower rates in recent years.



History May Not Repeat, But Economic Recovery Looks Bleak

There is no easy answer here, as experts continuously debate whether to be concerned about current inflation rates. With product demand rising amidst the holiday season and global supply chains still struggling to recover from surging prices for raw materials and transportation, the possibility of a sooner-than-later economic recovery looks bleak.


A question that dominates the minds of many at this time is what they should do with their money. We’re in a bull market right now, but people wonder when this will come to an end, and what to do with their money when the market ultimately turns bearish. Investors may want to consider looking into alternative investment vehicles, like 1031 exchanges and QOZs, that aren’t directly correlated with movements in the stock market.


Moving forward, all eyes are on the Federal Reserve’s tightening of monetary policy that’s likely to reduce borrowing and the amount of money circulating through the economy, resulting in a stronger US dollar, less spending, and a growing urgency to find work. For now, however, consumers may have to ride out inflated prices for everyday goods as they go about their holiday shopping.



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This is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation of any products or services. Opinions are subject to change with market conditions. The views and strategies may not be suitable for all investors and are not intended to be relied on for legal or tax advice.

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