Think Inflation Is Bad Now? Let's Take A Step Back To The 1970s

May 29, 2021
Originally published on May 29, 2021 12:14 pm

The 1970s are starting to trend – for all the wrong reasons.

Today, prices for everything from gasoline to groceries are surging as the economy roars back from the pandemic recession. And that's raising concerns in some quarters about whether the United States is headed back to the awful economic days of the 1970s, when the country was gripped by double-digit inflation that required painful action by the Federal Reserve.

The Biden administration insists those concerns are far off the mark, and that the days when Americans sported campaign-style "Whip Inflation Now" buttons on their wide lapels are long gone.

"I came of age and studied economics in the 1970s and I remember what that terrible period was like," Treasury Secretary Janet Yellen told a House subcommittee Thursday. "No one wants to see that happen again."

Yellen and others in the administration argue that the current run-up in prices is a temporary phenomenon, sparked by supply shocks tied to the pandemic, and pent-up demand from consumers — not the beginning of a persistent, upward spiral like the one that spawned "stagflation" in the '70s and haunted presidents from Richard Nixon to Jimmy Carter.

To understand the differences between the two eras, it helps to take a step back in time.

The 1970s were bookended by oil shocks that brought soaring prices for gasoline. Meat prices also spiked. On the popular sitcom All In The Family, Archie Bunker was reduced to eating meatless spaghetti.

In this Dec. 23, 1973 file photo, cars line up in two directions at a gas station in New York City. The 1970s was a period defined by devastating double-digit inflation, requiring drastic action from the Federal Reserve.
Marty Lederhandler / AP

Prices actually started creeping up in the mid-1960s, when the federal government was spending heavily on both the Vietnam War and the Great Society. Nixon temporarily froze prices in the early 1970s, but that just postponed the pain. When his controls were lifted, prices bounced even higher.

Gerald Ford declared inflation "Public Enemy Number One." Carter called it the nation's most pressing domestic problem.

Despite the tough talk from the White House, prices kept climbing.

Princeton economist Alan Blinder says psychology was partly to blame. In the 1970s, Americans came to believe that high inflation was here to stay. And that expectation became a kind of self-fulfilling prophesy.

"If you're a business and you expect the inflation rate to be 5%, you're likely when it comes time to set the prices for the next year [to] go up 5%," said Blinder, who was vice chairman of the Federal Reserve in the 1990s.

"On the other hand, if you think inflation is going to be 1%, you're more likely to go up 1%," he added.

Ultimately, it took a crackdown by cigar-chomping Fed chairman Paul Volcker to break the cycle of rising prices and wages. Volcker slammed the brakes on the economy by raising interest rates to 20% — tough medicine to prove he was serious about getting inflation under control.

"At some point this dam is going to break and the psychology is going to change," Volcker told the MacNeil/Lehrer NewsHour.

Paul Volcker, then undersecretary of the Treasury for monetary affairs, is pictured at a news conference in Washington, D.C.,. on Feb. 10, 1972. As Federal Reserve Chairman, Volcker sharply raised interest rates to cut down on double-digit inflation.
Harvey Georges / AP

It worked. By 1983, inflation had retreated to just over 3%.

It was a painful correction. Nearly 4 million people lost jobs in back-to-back recessions in the early 1980s. But for the last four decades, inflation has not been a serious problem in the U.S.

But now, some are sounding alarms. The Labor Department's consumer price index surged to 4.2% in April — the highest since Sept. 2008.

There are, however, key differences from the 1970s — including a change in expectations.

"If people believe that prices will be pretty stable, then they will be — because they won't ask for very high wage increases and people who sell things won't be asking for high price increases," Fed chairman Jerome Powell told Morning Edition. "Once that psychology sets in, it tends to perpetuate itself."

Blinder agrees the decades of stable prices since the 1970s should help to prevent another inflationary spiral in the future.

"I think the generation that were adults in that high-inflation period will always remember it," Blinder said. "But there are a lot of Americans that never lived with inflation at all. So naturally, they don't expect it."

Both the White House and the central bank are on the lookout for any signs that expectations are shifting – and they say a return to runaway inflation is as unlikely as a comeback for mood rings and bell-bottom jeans.

Correction: 5/28/21

A photo caption that appeared earlier with this story mistakenly said former Federal Reserve chairman Paul Volcker sharply raised prices to control inflation. He raised interest rates.

Copyright 2021 NPR. To see more, visit https://www.npr.org.

SCOTT SIMON, HOST:

Gasoline prices are on the rise. So are prices for lumber and used cars. Treasury Secretary Janet Yellen tried to reassure lawmakers this week that the recent jump in inflation is temporary, certainly not the beginning of a lasting upward spiral.

(SOUNDBITE OF ARCHIVED RECORDING)

JANET YELLEN: I came of age and studied economics in the 1970s. And I remember what that terrible period was like. And no one wants to see that happen again.

SIMON: The generations who've grown up since the 1970s have no recollection of that kind of inflation. NPR's Scott Horsley looks back on the lessons of a tumultuous decade.

SCOTT HORSLEY, BYLINE: Just two months after taking office in 1974 and one month after pardoning Richard Nixon, Gerald Ford stepped before a joint session of Congress to address what he called public enemy No. 1.

(SOUNDBITE OF ARCHIVED RECORDING)

GERALD FORD: We must whip inflation right now.

(APPLAUSE)

HORSLEY: In the mid-'70s, you could actually get a campaign-style button with that slogan to replace the yellow smiley face button on your wide lapels.

ALAN BLINDER: Oh, I still have my WIN button. It said WIN - whip inflation now - red buttons with white letters.

HORSLEY: But Princeton economist Alan Blinder says it was the country that got whipped in the '70s as inflation soared into double digits. Supply shocks were part of the problem. The Arab oil embargo and the Iranian revolution brought an end to the days of cheap gasoline.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED PERSON: Today's OPEC increases are expected to drive the price of unleaded up to a national average of 77 cents per gallon.

HORSLEY: Assorted farm calamities also drove up grocery prices. On "All In The Family," inflation was a not-so-funny punchline.

(SOUNDBITE OF TV SHOW, "ALL IN THE FAMILY")

JEAN STAPLETON: (As Edith Butler) Tonight we're having spaghetti with marinara sauce.

(LAUGHTER)

CARROLL O'CONNOR: (As Archie Bunker) Marinara sauce is nothing but lumpy juice.

(LAUGHTER)

STAPLETON: (As Edith Bunker) But, Archie, meat is so expensive.

HORSLEY: Prices actually started creeping up in the mid-'60s when the federal government was spending heavily on both the Vietnam War and the Great Society. Nixon froze prices in the early '70s, but that just postponed the pain. Once controls were lifted, prices bounced even higher. By 1978, Jimmy Carter was calling inflation America's most pressing domestic problem.

(SOUNDBITE OF ARCHIVED RECORDING)

JIMMY CARTER: Fighting inflation will be a central preoccupation of mine during the months ahead. And I want to arouse our nation to join me in this effort.

HORSLEY: Despite the tough talk from Nixon, Ford and Carter, prices kept climbing. Economist Blinder, who later served as vice chairman of the Federal Reserve, says psychology was partly to blame. In the '70s, Americans came to believe that high inflation was here to stay. And that expectation became a kind of self-fulfilling prophecy.

BLINDER: If you're a business and you expect the inflation rate to be 5%, you're likely, when it comes time to set the prices for the next year, go up 5%. On the other hand, if you think inflation is going to be 1%, you're more likely to go up 1%.

HORSLEY: Ultimately, it took a crackdown by cigar-chomping Fed Chairman Paul Volcker to break that cycle. Volcker slammed the brakes on the economy by raising interest rates to 20%. He told "The MacNeil/Lehrer NewsHour" tough medicine was necessary to prove he was serious about getting inflation under control.

(SOUNDBITE OF TV SHOW, "THE MACNEIL/LEHRER NEWSHOUR")

PAUL VOLCKER: At some point, this dam was going to break, and the psychology is going to change.

HORSLEY: It was a painful correction, with nearly 4 million jobs lost. But it worked. By 1983, inflation had retreated to just over 3%, and it stayed low for the last four decades. Now, though, with pandemic supply shocks and prospects for red-hot demand fueled in part by government spending, some see echoes of the 1970s. Inflation last month hit 4.2%. But both the administration and the Federal Reserve think that's temporary. And they're banking, in part, on changed expectations. We've now had decades of stable prices. And Blinder says that should help to prevent another inflationary spiral.

BLINDER: I think the generation that were adults in that high inflation period will always remember it. But a lot of Americans that never lived with inflation at all. So naturally, they don't expect it.

HORSLEY: Both the White House and the central bank are on the lookout for any alarming shift in expectations. But for now, they see a return of runaway inflation is about as likely as a comeback for mood rings and bell-bottom jeans.

Scott Horsley, NPR News, Washington. Transcript provided by NPR, Copyright NPR.