aspects of 1970s inflation no one’s discussing

Personally, I don’t think inflation is an important stock market issue, other than that it may become a textbook case of the madness of crowds.

For one thing, even if current supply chain disruptions lead to a one-time increase in the price level (I think this may well happen. That’s a story for another day, though), that isn’t inflation. Inflation is a sustained (years-long) upward movement in the price level. Often it’s engineered by a heavily-indebted government to diminish the real value of its obligations to creditors. I can’t see any reason to believe the US is in that situation now.

“Stagflation,” the tale of the US in the 1970s, is a combination of economic stagnation and rampant inflation. My unscientific view of the “stag” part is that it resulted from Europe and Japan returning to world commerce in the 1960s after rebuilding industrial capabilities that were obliterated by bombing during WWII (plenty of help from the US in both destroying and rebuilding). When I entered the stock market in the late 1970s, the US was slipping from being the only industrial game in town to being the guy with outmoded plant and equipment. Japan and Europe had brand new steelmaking plants, for example, while US Steel was still operating blast furnaces built in the 19th century.

the 1970s inflation

On the inflation front, which is what I really want to write about today, there were two key factors in the 1970s that are hard to appreciate for anyone who didn’t live through that time.


The first is the price of oil, which was a much more important economic issue in the 1970s than it is today. The average oil price in the US in 1970 was about $3.50 a barrel. By 1980, that had risen to $37.50, a 10.7x increase.

Two reasons:

–the rise of OPEC, a cartel of oil-producing countries in the developing world formed in 1960. The 1970s saw two major oil price “shocks,” when OPEC demanded–and got–big price increases for its crude.

The US was unique in its bungled response to this development. Congress enacted a bizarrely complex system of price controls and output allocation aimed at keeping domestic consumers from feeling the full effect of the higher OPEC price. As these things typically go, the new rules had the opposite effect. Domestic oil producers shut down older wells, rather than sell at a steep discount to world prices. Detroit kept on cranking out gas-guzzlers, not helping conservation efforts at all–and ultimately leaving it vulnerable to more fuel-efficient imports.

Anyway, the equivalent move in today’s world would be crude at $500 a barrel. I’m guessing that won’t happen.

employment contracts tied to the CPI

–Large portions of the domestic workforce of the 1970s had employment contracts. In today’s world, that’s strange enough. But these contracts called for yearly cost of living increases. Most often these raises were tied to the CPI. Sometimes, raises were CPI plus some amount, say, 1%. Never a minus, however. More important, though, is that the CPI tended to overstate inflation in a way not clearly understood at that time (it used a fixed basket of goods in its calculation and didn’t account for substitution–the possibility that people would buy a Toyota rather than a more expensive Chrysler and be just as well off). So even if there were no explicit real wage increases specified in these contracts, they all ended up raising wages in real terms.

Economists know better now–and I think the CPI is less inflation-inducing than way back then. The demise of unions has meant fewer worker contracts.

–A third key aspect of 1970s inflation was, of course, many years of unnecessarily loose monetary policy, to the point that Washington was forced to issue Treasury bonds denominated in D-Marks and Swiss francs rather than dollars during the Carter administration. We’re nowhere near that point today.

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