How Does The Inflation And Oil Shock Of 2022 Compare To The Late 1970s?

The Labor Department recently reported a 7.5% increase in the consumer price index in the month of January, the fastest inflation growth since 1982.

While inflation rates at 40-year highs may seem scary at first glance, economists say today's economic situation is far different than the period of hyperinflation in the late 1970s and early 1980s.

Deja Vu? It's understandable why the recent climate of soaring commodity prices, skyrocketing money supply and massive government spending initiatives are drawing comparisons to the 1970s.

Government stimulus payments boosted consumer demand during the pandemic. Throughout 2020 and 2021, the U.S. Federal Reserve chose to let inflation rise, in part because the Fed believed it had focused too much on inflation since the 2008 financial crisis. That decision likely suppressed job and wage growth for Americans.

Related Link: Over $4 A Gallon: Gas Prices Surge To Highest Levels In Over A Decade

U.S. Treasury Secretary Janet Yellen has argued that supply chain disruptions and pent-up consumer demand have largely contributed to U.S. inflation in recent quarters. The Fed insisted throughout 2020 and 2021 that inflationary effects were temporary, and they may still prove to be. Yet there have been no clear signs of inflation moderating up to this point, a phenomenon that has increasingly spooked investors.

Public perception may seem to be immaterial to economic measures like inflation, but it's actually extremely important. Businesses that expect elevated inflation rates in the coming year will raise prices on goods and services in anticipation, and inflation becomes a self-fulfilling prophecy.

In 1981, Fed Chair Paul Volcker took aggressive measures to get inflation in check by raising the fed funds rate to 20%.

"At some point this dam is going to break and the psychology is going to change," Volcker said at the time.

Key Differences: By 1982, the last time CPI inflation was above 7%, inflation levels were dropping sharply from peak levels of 14.8% in 1980. In late 1982, U.S. unemployment reached 10.8%. Today, unemployment is around 4% and is within reach of 50-year lows of 3.5% set just before the pandemic began.

The 1970s inflationary period also included a spike in oil prices, but the global energy market also looks a lot different today than it did then. Still, the comparisons are understandable.

"Geopolitics is back into energy, and energy is back into geopolitics, in a way that hasn't been the case since the 1970s," Pulitzer Prize-winning author and historian Daniel Yergin recently said.

In 1973, the Organization of Arab Petroleum Exporting Countries placed an oil embargo on the U.S. for its support of Israel during the Yom Kippur War. In 1973, the U.S. was forced to import 36% of its crude oil.

Today, the U.S. is the largest oil producer in the world, accounting for 20% of the world's total oil production as of 2020. Oil prices have recently spiked, but this time it's because of international sanctions on Russia following its invasion of Ukraine. 

Related Link: How The Collapse Of The Russian Ruble Could Impact Your Portfolio

Benzinga's Take: The next few months will likely go a long way in determining just how closely the 2020s will resemble the economics of the 1970s. At this point, at least, there are far too many differences between the 1970s and today to jump to any meaningful conclusions about where the U.S. economy is headed in the next several years.

Automobiles lining up for fuel at a Maryland service station, June 1979. Photo via Wikimedia

Posted In: InflationJanet YellenPaul VolckerGovernmentRegulationsEducationCommoditiesPoliticsTop StoriesEconomicsMarketsGeneral

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