Stagflation, a term coined in the United Kingdom in 1965, defined the years from 1970 to 1981 in the U.S. Inflation rose to almost 15%. The economy went through three recessions. Unemployment reached 9%. Fed Chairman Paul Volcker finally conquered inflation, but only by dramatically boosting interest rates, causing a severe recession in 1981-82.
Today's circumstances are far from that. Inflation is lower. Unemployment has risen, but only to 4.9%.
Yet there are similarities. As in the 1970s, surging commodity prices are leading the way. Crude oil rose to $100.74 a barrel yesterday, a new nominal high and close to its 1980 inflation-adjusted high. Wheat prices have hit a record. And, as in the 1970s, the rate at which the U.S. economy can grow without generating inflation has fallen, because of slower growth in both the labor force and in productivity, or output per hour of work.
The biggest difference is that in the 1970s" the Fed was unwilling, or thought itself unable, to bring inflation down. The Fed today sees achieving low inflation as its primary mission.
'Suffer for a While'
"The reason we're so unlikely to see a repeat is we're not adding irresponsible policy," says Christina Romer, an economist at the University of California at Berkeley and a historian of Fed policy. That means if the Fed is wrong in thinking inflation's recent rise is temporary, it will tolerate economic weakness in order to get inflation down again. "They'd have to let us suffer for a while."
