inflation: 1970s vs. now

There are superficial similarities between the recent high inflation the US is experiencing now and the hyperinflation of the late 1970s. It seems to me, though, that the differences between then and today are an awful lot greater. This appears to me to have completely escaped the notice of the financial press, maybe because the headlines wouldn’t be as sensational.

My take:

oil

In 1970, the price of Saudi oil was about $1.80 a barrel. Then came the oil “shocks” of that decade as OPEC asserted its economic power. By 1980, crude was at around $36 a barrel, a 2000% increase during the decade.

In contrast, although the current oil price is double the decade lows, and is roughly 50% higher than the decade average, it’s about the same today as it was in 2012. Though the current situation is dramatic to us, it’s a bump in the road compared with the 20x rise in the 1970s.

worst-in-the-world response to the 1970s oil shock

In the 1970s, the US, uniquely among world powers and aiming to protect a sad-sack domestic auto industry, instituted a complex system of price controls (old vs. new oil) on crude production, as well as volume and location controls on the sale of refined products. The latter caused widespread shortages (urban/suburban consumers were afraid to drive long distances to vacation spots, for example, but Congress mandated all the gasoline be sent away from the cities to resort locations in the summer). The former prompted the oil majors to lose interest in lifting lower priced “old” oil. The result: higher usage, higher prices and lower production from the world’s largest oil consumer.

Today, in contrast, we’re by and large doing what we should have done then, living with the higher prices and letting consumer behavior adjust

wages

–in the 1970s, large portions of the workforce worked under multi-year contracts that called for wages to rise annually in line with the CPI (sometimes a bit higher). The CPI tends to overstate inflation, something not well understood at that time, and sometimes wage increases were CPI+. The result was, according to the Pew Research Center, that wages grew 7%-9% a year. This produced real wage gains from 1964-1980, in addition to big increases in the nominal amounts.

In other words, at least part of the accelerating inflation of the 1970s was baked into the wage cake.

Today, we have, if anything, the opposite problem. Except for the highest-paid workers, there have been no real wage gains in the US over the past decade +.

expectations

the consumer

In the 1970s, consumers expected that inflation would accelerate, thereby damaging the value of any savings. So the better course of action, we thought, was to spend as soon as possible, or “invest” in tangible assets.

Today’s consumer surveys, in contrast, indicate that people expect the current inflation to return to 2%-3% annual rate over the next year or two. This makes sense, since it’s the lesson taught by the past forty years of disinflation.

corporations

Toward the end of the 1970s, when I was beginning my career as an oil analyst, there was panic in corporate board rooms, especially of mature companies with slow-growing profits, whose main investment attraction was a, say, 4% dividend yield. I don’t remember the names, but such companies decided to “save” themselves by buying gold mines or hotels or office buildings–assets and businesses they knew nothing about. This was, as you might think, almost an immediate disaster. But it illustrates how out of control even seasoned businesspeople thought the economy was.

Nothing like that is happening now.

the dollar

The dollar was a relatively weak currency during the latter part of the 1970s. World confidence was so low that during the Carter administration, the Us was forced to issue Treasury bonds denominated in Swiss francs and German D-marks.

The opposite is the case today, with the dollar excpetionaly strong.

4 responses

  1. For now, I think you’re right, partly because the analogous time for today might be 1971-1973. but I was in junior high then, so maybe not.

    • I was in the army for about half of 1971-73 and in philosophy school for the rest. I didn’t get involved in the stock market until late 1978. So what I know about the 1970s either comes from books or talking to the veteran analysts who sheltered at Value Line after the brokerage industry imploded in 1973-4. Anyway, I can see the parallels between the Nifty Fifty, plus Watergate plus the impending collapse of the UK economy and the recent tech stock mania plus war-induced economic problems in Europe plus the coup attempt. I’d like to think that the next step isn’t a reprise of 1974, though. And to me the air coming out of the residential real estate market argues that people aren’t manic about turning financial assets into physical assets.
      I’ve just recently begun to think, though, that maybe professionals have beaten the inflation horse to death and that the bigger issue for stocks may be how many FedEx-like companies are out there–firms that did things that now appear really stupid, or whose fortunes have changed dramatically, as we shift into a post-pandemic world but have yet to alert investors.

  2. Thank you for reminding us of the US price controls and other regulations that led to soaring gasoline prices and “shortages” in the 1970s. In my observation, the consequences of such interventions were rarely understood at the time, and have been generally ignored ever since.

    • I think that’s right. Two side notes: Washington didn’t trust the big oils to allocate supplies of gasoline fairly, so it mandated that they follow the precise seasonal patterns pre-crisis. This meant, for example, shifting supplies away from the NYC area to upstate, the Jersey shore and the Hamptons as summer approached. The shrinking supply made people doubly unwilling to travel. Also, the regulations mandated that oil discovered before 1972 had to be priced at roughly half the level of post-1972 oil. My reaction at the time was that, contrary to what they were professing, the big oils simply wouldn’t produce “old” oil until the price controls were lifted. I confirmed my hunch in the mid-1980s, when executives at the big oils began to be willing to reminisce.

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