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Stagflation in the 1970s

In the world of economics, economic stagnation, sometimes known as recession-inflation, is a state in which joblessness is consistently high, the economy is growing slowly, and the inflationary rate is either high or rising. It creates a problem for monetary strategy because measures taken to reduce inflation may worsen poverty.

Stagflation in the 1970s

Iain Macleod, a member of the British Conservative Party who was appointed Controller of the Treasury in 1970, is usually credited with coining the phrase, a combination of unemployment and inflation. In 1965, when the UK was experiencing both high unemployment and rising inflation, Macleod used the phrase in a speech before Parliament.

He told the Parliament to be aware of the seriousness of the circumstance but united together with them both. We are experiencing something like "stagflation." In the contemporary sense, history is being created.

On July 7, 1970, Macleod was using the phrase once more, and by July 15, 1970, The Economics expert and by March 19, 1973, Newsweek, among other publications, had started to use it as well. Although Keynes himself did not employ the phrase, certain of his writings make reference to the situations that most people today would identify as stagflation. Unemployment and recession were considered to be independently distinct in the type of Keynesian macroeconomics that predominated between both the conclusion of World War II as well as the late 1970s, with their connection being defined by the Phillips curve. Economic stagnation is very expensive and challenging to end once it begins.

Its 1970s economy

Consider the rising government fiscal deficits caused by Great Society's social expenditure initiatives to address poverty and military expenditure during the War In Vietnam. Include the failure of the Bretton Woods pact, which linked the industrialized economies' values to the currency, which in response was supported internationally by American gold reserves.

Add to that the Arab oil embargo, which caused crude oil prices to triple (for an economy considerably more reliant on petroleum than we are now), and the U.S. embargo on Iranian oil after the decade, which caused prices to nearly triple again. Add periodic recessions that increase joblessness without significantly slowing inflation. Add a Reserve Bank that appears to be committed to stimulating the economy as a weaker country unable to control rising prices.

This combination of reduced living conditions and waning faith in monetary strategy in the 1970s didn't exactly induce nostalgia. Authorities permitted growth and inflation to persist in the face of external changes in the economy, which discouraged investment. The cost of West Texas Medium crude oil exceeded $100 per gallon in 2019 currency in November 1979, reaching a peak of $125 the subsequent April. After 28 years, that pricing level wouldn't be surpassed.

However, concerning signals started to appear in the 1960s and 1970s. During 1968 and 1970, the index of consumer prices increased by 11% while the jobless increased by 33%. Real earnings started to decline in the same period. Economic analysts were perplexed by stagflation, or concurrent inflation and stagnation: often, Prices decreased as salaries decreased, and raised when wages grew. not in the 1970s, though. Americans' buying power decreased as a result, which put American exports that were becoming more costly at a loss on the world economy. The United States had a negative global balance of trade for the first time after 1893 in 1971.


The main causes of stagflation are explained by two factors, according to experts. First, a positive shock to the business, such as a sharp rise in the cost of oil, can lead to stagflation. That kind of negative circumstance frequently leads to price increases while also slowing productivity expansion because it raises the expense and decreases the profitability of manufacturing.

Second, stagflation can be brought on by government actions that hurt businesses and expand the monetary base too fast. Since neither policies that induce inflation nor those that restrict economic growth typically cause the other to happen, both two things would almost certainly have to happen at the same time.

  • Supply Shock

Israel attacked the Sinai Peninsula and the entire route to the Suez Canal at the beginning of the 6-day War. As immediately as the Six-Day War began in 1967, the President of Egypt, Gamal Abdel Nasser, who had supported the Soviets, shut down the Suez Canal for eight years. It was necessary to reroute oil traveling through the Suez Canal from the Near East to Europe by going all around the African Continent.

  • Excessive Demand

Slightly earlier in the 1970s, the value of the currency in the United States rose at a rate of about 15% per year, but the Index of Consumer Prices lagged by one or two years. Additionally, Britain's dovish financial system contributed to excessive demand.

  • The Bretton Woods System's Demise

The Bretton Woods agreement began to collapse in the middle of the 1970s, and nations' fixed rate of exchange arrangements among economies started to fluctuate. The Gold standard, in which values were linked to gold, was also discarded at this time. After years of success, the gold prices and oil became increasingly bizarre.

  • Comparative Accumulation

The divergent acquisition interpretation of economic stagnation, a concept put forth by academics Jonathan Nitzan & Shimshon Bichler, contends that there is a connection between acquisitions and mergers, economic stagnation, and worldwide. According to the demand shock hypothesis, they claim that asymmetrical accumulation encourages mergers and acquisitions that consolidate the ability to limit the supply of goods and amass capital in private hands and lead to increased risks of economic stagnation.

  • Demand-Pull

Developed by analyst Eduardo Loyo, the demand-pull great recession theory claims that economic stagnation can occur entirely from monetary policy shocks even without the necessity for a supply-related disruption. This happens when financial constriction regulations are implemented by governments, such as increasing the federal rate of interest or reducing the money supply.

  • Cost-Push

Supply-side inflation is one of the main causes of economic stagnation, according to the rising cost theory. Since price increases typically result in lower profitability for businesses, which reduces business growth, they, in this situation, also reduce unemployment. Tariffs, salary rises, and labor shortages are a few additional factors that might affect supply-side inflation.

  • Worst Monetary Policies

According to the "poor policy theory," poor economic decisions frequently lead to economic stagnation. The administration and central bank frequently make poor decisions while attempting to control the market. For instance, following the Employment Rights act of 1946, the U.S. was before the 1970s concentrated on maximizing employment throughout their industry, which unintentionally increased inflation and negatively damaged jobs and development.

The Nixon Shock, which saw the currency devalued and nominal wage freezes enacted, is evidence that government actions controlling the market can also have had an influence. Eventually, since actions promote their goals of stable prices, high employment, and economic expansion, central banks and lawmakers battle on how to prevent economic stagnation.

  • Other Factors

The other interpretation, which goes against the supply shocks hypothesis that the 1970s economic stagnation was caused by OPEC's doubling of oil and gas prices in October 1973, is backed by a wealth of different data. According to data, its seeds were planted in the late 1960s and its harvest started in that era. Between 1968 to 1970, the CPI increased from 4.7% to 5.6%, while joblessness increased from 3.6% to 4.9%.

Moreover, throughout 1967 and 1970, the predicted inflation rate in the Michigan poll increased from 3.8% to 4.9%. The increase in inflation expectations lends substantial credence to the idea that the initial, moderate stagflation can be explained by the Expected Augmented Phillips Curve (EAPC). Despite a little negative pressure on prices due to the faltering economy, annual inflation increased in line with EAPC, as anticipated.

Later in the 1970s, economic stagnation worsened but was curbed by price restrictions and a pay freeze enacted by President Nixon beginning in August 1971 and up until 1972. However, the CPI shot up to 8.5% when the limits were abolished in the middle of 1973. It might be argued that the mini-stagflation described earlier would have been obvious before the October 1973 increase in OPEC oil prices if pay rate restrictions had not been in place.

Concerning the immediate connection between the devaluation of the dollar and rising prices, data once more suggest that, just as rising inflation shifted the supply of labor curve upward and caused workers to require and obtain higher money wages, a falling dollar caused primary commodities producers to expect higher prices to make up for the devaluation of the dollar.

Furthermore, the dollar's decline was a delayed reaction to growing inflation starting in 1968, despite being exogenous to oil prices. This economic trend of overheating resulted in hyperinflation, and dollar devaluation, and after that, there was an increase in oil costs before 1979 saw the second round of stagflation.

In assessments of the Western stagflation of the 1970s, various interpretations are put forth. The payment spiral started with a sharp increase in oil prices and persisted as banks deployed an overly accommodative monetary policy to address the ensuing recession.

A shortage of trained workers and rising wages for them may result from higher necessities for abilities like education and training in the workplace, including such higher technological difficulty, while also the time that poorly educated job functions have shifted in part to low-wage countries like Asia, leading to high joblessness.

The Evolution of the Monetary approach

The credit crunch by the Volcker Fed was in line with the scriptures of Milton Friedman, an economist of America and foremost supporter of liberal economic theories, who asserted capital stock was the main determinant and effect of rising prices. This is similar to how the Fed under Arthur Burns' current leader in 1970-1978 was impacted by Keynes.

The Volcker Fed successfully reduced inflation by concentrating on reducing the supply of money through raising interest rates, but at a severe price.

However, financial markets quickly lost favor as a guiding tool due to the expansion of the financial sector and the introduction of new credit and investment instruments, which caused the supply of money indicators to rise far more quickly than prices.

However, due to workers' diminished ability to bargain after the early eighties times of recession, there was a probably large reduction in price inflation due to the drop in union jobs. The economy's decreased oil consumption concentration and the subsequent decline in fuel prices both contributed to this.

Stagflation in 2022

Because the past year saw a rapid comeback in consumer spending mixed with severe supply management concerns that have pushed price hikes, several analysts were afraid that the U.S. could see indications of stagflation in 2022. While the Fed Reserve started its program of interest rate increases, the Russian war in Ukraine also resulted in soaring fuel costs. Stagflation has the potential to trigger a crisis if it continues to generate accelerating GDP declines. In three important ways, the present moment is similar to the early 1970s:

  • Massive inflation and slowdown. Similar to how it did following the stagflationary era that followed the deep recession in 1975, the financial system has been recovering from the virus outbreak worldwide downturn of 2020. Worldwide price level between 1973-83 amounted to 11.3 % a year and over 2 - 3 times as much as the mean of 3.6 percent a year between 1962-72.
    Whereas the high inflation after the economic downturn of 2020 brought on by the COVID-19 epidemic has become less pronounced than after the recession of 1975, the expected decline in growth is far more pronounced. Worldwide growth is anticipated to decline by 2.7 percent between 2021 and 2024, more than double as often as during 1976 and 1979.
  • After extended monetary and fiscal policy relaxation, supply shocks. The pandemic-driven supply interruptions and the most recent supply shock caused by Russia's war with Ukraine to the world's fuel and resource prices are comparable to the oil crisis of 1973 and 1979-1980. The 1970s saw an improvement in energy costs. The biggest price increases in the last 50 years occurred between 2020 and 22. In the lead-up to these events, especially at the time, the financial system was usually quite accommodating, with rates of interest being zero in fact for decades.
  • Major weaknesses in poor and emerging economies (EMDEs). Like now, EMDEs were susceptible to tighter financial circumstances throughout the 1970s and 1980s due to heavy debt, high inflation, and fragile financial situations. The first worldwide wave of debt buildup in the previous 50 years occurred at the same time as the economic stagnation of the 1970s. A rise in EMDE debt was supported by low-interest rates across the board and the quirapid growth of syndication lending markets, particularly in Central America and numerous reduced nations. The fourth and present wave of worldwide government debt that began in the 2010s was the quickest, greatest, and perhaps the most diversified rise in EMDE public debt in the previous 50 years. Many LICs are still in, or on the verge of, a debt crisis. The dangers are increased by the sheer size and rate of debt accumulation.


A finance minister has a difficult job, to put it mildly. While independent analysis attempts to keep up with the economy's constant evolution.

The future Fed chair Bernanke proposed "limited discretion" in his 2003 lecture, which critiqued the Economic Crash and the 1970s stagflation policy responses and gave Fed employees extensive freedom to pursue specified policy agendas.

No Fed goal is as clearly stated as the institution's intention to pursue price stability by striving for a rate of inflation of 2% on average over the long term.

This is one of the reasons market inflationary pressures stayed muted even as supply interruptions caused U.S. annual inflation to soar to a 40-year peak in 2022. The main takeaway from the economic stagnation of the 1970s is that the Federal can only sustain the reputation it has worked so hard to establish by acting quickly to curtail long-term departures from its planned rate of inflation.

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