October Surprise: Inflation! But No, 1970s Stagflation Is Not Returning
Consumer inflation is back. From meat to gasoline, inflation has been modest for three decades. Is high inflation, low growth returning?
It’s remarkable to contemplate the economic news from January 1980. As the Washington Post reported January 26, 1980: “Consumer prices shot up 1.2 percent in December, the most in any month last year, and prices for the year [1979] rose 13.3 percent, the most since 1946, when President Harry Truman lifted wartime controls, the Labor Department reported yesterday.” Ronald Reagan reportedly said in 1981 that inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.
Now, in September, the consumer price index (CPI) rose 0.4%; food prices rose 0.9%. It was the largest rise in food prices since April 2020 largely due to the cost of meat. The CPI (the weighted average of prices for a basket of common consumer goods/services such as transportation, food, and medical care) is a better gauge of the effect of price inflation, i.e., the diminished value of the dollar’s ability to purchase something than just broad inflation. Price inflation in certain sectors hurt consumers more than in others.
For many Americans under 40, significant inflation is a mostly unknown phenomenon. The Bush-Obama years saw limited inflation on a yearly basis. Inflation reached five percent in 1990 and then declined for three decades, though purchasing power and wage growth also effect how much actual money people have to spend.
A New Misery Index?
Beyond fuel costs, meat prices represent another component of the challenges facing consumers. The coronavirus epidemic resulted in diminished meat production as meatpacking plants closed down while frontline workers became ill with COVID-19 throughout 2020. Now, increased transportation costs (truck and freight) are adding to the cost of beef, poultry and pork as are increasing feed costs. Labor shortages, too, in transportation and retail establishments add to the cost increases.
The chief economist for the U.S. Department of Agriculture recently projected that the market year average (MYA) price, covering September 2021 until August 2022, for both corn and soybeans will be the third highest since MYA projections have been offered by the USDA.
Additionally, urban housing/rental costs are rising rapidly. A perfect storm of employers in large metro areas requiring workers to return to offices, a vibrant housing market, and the continuation of rental housing stock shortages that predate the coronavirus epidemic.
So, are the bad old days of high unemployment, minimal GDP growth, high interest rates and high inflation returning? 1979 redux? Likely not. Back then, high interest rates constrained private sector growth: the federal funds rate was 11% in 1979 on its way toward nearly 20% in 1981. Now, the fed rate is .25%.
Both the U.S. and global economy are emerging from an unprecedented challenge brought on by the coronavirus pandemic. A recent growth forecast from the IMF was mostly good news. Global growth in 2021 is forecast at 5.9%, down slightly from the 6.0% forecast made in July. The 2022 global growth forecast remained unchanged at 4.9%. Supply chain challenges in the U.S. will take a few months to remedy so the challenges for holiday shoppers and retailers will be many. Some good news: Federal Reserve Chairman Jerome Powell expects inflation to remain a challenge into early 2022 but then to taper off. In 1979, the Federal Reserve was struggling to rein in inflation and stimulate the economy in a post-1971 world where the value of the dollar was no longer linked to gold (the gold standard).
Another difference between then and now: the energy crisis which spurred President Jimmy Carter to talk about a crisis of confidence in July 1979 is absent in 2021. Gasoline prices are high, oil prices are high but OPEC producers are now an integrated part of the global economy and their financial as well as fiscal fortunes are tied to the health of developed and developing economies like the U.S., China, the EU and India. Adjusted for inflation, gasoline today is still about twenty percent cheaper than it was in early 1980.
Unlike 1979–80, there is no revolution in Iran or an Iran-Iraq War to disrupt Gulf oil production and transport. The OPEC+ producers have maintained surprising discipline in oil production quotas. Additionally, new oil producers and advances in extraction techniques represent another source of oil production that will serve as a buffer to oil reaching $90 per barrel barring unforeseen circumstances.
Another factor is federal stimulus to the American economy. From individual stimulus payments in 2020 and 2021 to paycheck protection programs the American economy has shown impressive resilience over the past 18 months. Another Biden administration “build back better” fiscal program of $2 trillion would provide additional support to the American family and consumer.
A wild card: unemployment. The rate in the U.S. is currently at 4.8% with a significant number of American workers either having left their current positions this year or are currently looking for newer jobs with higher pay or better benefits. How this will impact GDP growth or interest rates in nine months is a big unknown. Unemployment was rising in late 1979 and would approach 8% in mid-1980.
As historians and economists have previously noted, the so-called crisis of confidence in 1979 was as much a psychological one as an economic one for the American nation. The decades long domestic post-war boom that culminated in the U.S. representing 40% of total global GDP in 1960 had ended. But the strengths of the American economy today are many and global growth projections for 2022 rely heavily on the strength of both the American and Chinese economy — as well as their cooperation.
Beyond the reputation challenges that 1979 seems to have incurred, there were some memorable historical moments in the United States: Jimmy Carter and USSR leader Leonid Brezhnev sign the SALT II agreement in Vienna, Polish Pope John Paul II visited the United States and automaker Chrysler received $1.5 billion in controversial loan guarantees from the U.S. government. Inflation is back in 2021, just not like 1979.
