Stagflation: The 1970’s and Today
Have you learned from history?
Many years ago, a car dealer told me a story about inflation and price controls in the immediate aftermath of WWII.
A car buyer walked into a dealership and asked about the price of a new model. Strangely, a tie had been placed on the front seat. The dealer quoted the customer the government-controlled price. Charging a higher price would have been illegal. The customer then asked about the price of the tie…
This “too many dollars chasing too few goods” type of inflation always seemed to occur during times of economic expansion. Consumers would buy what they could before it went up in price, juicing the economy. However, when the economy was bad, consumers cut back. Any retailer who dared raise prices had to watch their inventory sit on the shelf.
In the 1970’s, something new happened. It turned out that if energy prices rose quickly, the U.S. could experience both high inflation and a stagnant economy. This is called stagflation. It happened in 1974 and 1975 due to the Oil Embargo, and in 1979 through 1981 in the aftermath of the Iranian Revolution.
This time around, there has also been an energy shock, although its roots are more complex. One component is domestic, with energy companies finally prioritizing profits after years of drilling wells as quickly as possible. Another component is overseas — the war in Ukraine and apparent lack of spare capacity within OPEC. These factors have combined to cause higher prices for everything that moves on roads, on rails, and through the air as well as for goods such as fertilizer that take fossil fuels as input.
At the same time energy and energy-dependent food costs are shooting higher, so are housing costs. In pandemic boomtowns such as Phoenix and Tampa, both apartment rents and single-family home prices have exploded. Sure, there are losers in the pandemic migration, but these locations (San Francisco, New York City, etc.) are still unaffordable to the vast majority of the American population.
When transportation, food, and housing costs all rise steeply at the same time, the discretionary income of lower-income consumers is wiped out, and even upper-middle-class consumers have to cut back. This effect is on full display in Walmart’s fiscal Q1 2023 earnings. Speaking on the earnings call, C. Douglas McMillon, Walmart President, CEO, and Director stated,
The rate of inflation in food pulled more dollars away from GM [general merchandise] than we expected as customers needed to pay for the inflation in food.¹
Combined with this abnormally high inflation, the economy as measured by Gross Domestic Product has contracted in both the first and second quarters of 2022. Stagflation has arrived, whether or not economists think there is currently a recession.
So, what can you do to fight stagflation? Well, the last time around, I recall that people who were able to hold on to at least some of their savings invested in Treasuries. The yield on 10-year Treasury Notes peaked at 15.84% in September 1981, significantly above the peak inflation rate of 13.55% in 1980. It guaranteed a fantastic return for years after inflation had subsided.
Unfortunately, this escape hatch is closed. Inflation for July 2022 was 8.5%, but the 10-year Treasury is currently yielding just 3%. That’s better than a mattress, but far too low to make a real difference for most savers.
Series I Savings Bonds or “I Bonds” have been in the news lately. Their current interest rate is 9.62%. However, I Bonds come with some serious limitations. First, there is a purchase limit of $10,000 per year (for electronic purchases). Second, the rate is currently variable in its entirety for new purchases. If inflation were to decline in the future, the I Bond interest rate would likely decline as well.
Beyond investing there is another coping mechanism I’ve observed — getting a second job. In July 2022, 4.8% of employed workers held multiple jobs. Some companies, especially in the warehousing / logistics sector, seem to be adding part-time evening shifts and even offering full benefits after successful completion of a probationary period. However, please be forewarned that such jobs often involve significant physical challenges (to the point they become mental challenges) in environments that may not be climate controlled.
Ultimately, the best weapon against stagflation is hope. Eventually, inflation comes down. Eventually, the economy starts growing again even if the businesses and jobs it generates aren’t the same as before. Political actors who contributed to the problem will be voted out of office sooner rather than later, but even the most ordinary worker, if he or she is flexible and creative enough, will be able to survive the bad times and thrive once they end.
¹Excerpt from 17-May-2022 Walmart, Inc. Q1 2023 Earnings Call corrected transcript, p. 4, ©2022 FactSet CallStreet, LLC. Retrieved 07/26/2022.
