This is the worst inflation in almost 40 years. But it was so much worse back then

Overall, consumer prices rose in 2021 at the fastest rate in 39 years, meaning this is the worst inflation experienced by anyone not on the cusp of the retired or older.

But, as these older Americans can tell you, distasteful as they are to consumers, today’s price increases are nowhere near as bad as they were in the 1970s and early years. 1980s. And more importantly for policymakers trying to cope with today’s price hikes, what fueled double-digit price increases back then is not a factor today. – and it is likely that they will never be again.

“We learned our lessons from this experience,” said Louis Johnston, professor of economics at the College of Saint Benedict in Minnesota.

Presidents Gerald Ford and Jimmy Carter both tried unsuccessfully to bring prices under control. Ford’s efforts included a “Whip Inflation Now” or WIN campaign, complete with shiny red buttons, which didn’t help much with pricing. Inflation hit 12.2% at the end of 1974, shortly after he took office, nearly double the annual rate of increase until November of last year.

The inflation rate hit a record high of 14.6% in March and April 1980. It contributed to Carter’s defeat in that fall’s election. It also brought about significant changes in the US economy.

Today, the inflation rate stands at 6.8% in November. It could rise slightly when December’s numbers are released on Wednesday, but it won’t come close to those previous highs.

Here are some of the different key factors of the American economy today and the economy of the 1980s:

Price related wages

One of the main differences between inflation yesterday and today is that a much higher percentage of the American population were unionized workers, and many of those workers had what were called unionized workers. cost of living adjustments, or COLA, incorporated into their contracts. This increased their wages automatically as the prices went up. Thus, higher prices resulted in higher wages, which put more money in the hands of consumers and increased costs for businesses. He created what was called the “wage-price spiral” that fueled the price hike.

Even non-union employers would raise wages to keep pace with inflation or risk losing workers to unionized employers – or risk making a case for organizing campaigns in their companies.

Today, only about 12% of workers are represented by unions, about half the rate in 1983, the first year for which the government recorded these data. Unionized workers today are mostly public servants, such as teachers, police and firefighters. Only 7% of workers in the private sector are unionized. And most of them don’t have COLA clauses in their contracts. During the long period of low inflation over the past two decades, unions were prepared to forgo COLAs in exchange for further improvements in wages and benefits.

The only widespread COLA currently in force is for Social Security beneficiaries, and employers do not feel the need to set wages to compete with these benefits.
Wages are rising due to record vacancies and a shortage of workers. But even these wage increases are lower than the rate of inflation, so they’re unlikely to translate into higher prices.

Global price control

In the 1970s and 1980s, higher costs could be passed on to consumers in the form of higher prices than today because competition from overseas imports was not as strong as it is today. hui.

While foreign competition existed at the time, in many sectors of the economy companies only had to worry about domestic competitors. This is no longer the case.

The boom in world trade has helped contain inflation over the past decades. Some of the current inflation is attributed to issues with the global supply chain, which has caused shipping costs to rise worldwide. This therefore limited the supply of low-cost competition, allowing even major domestic firms to raise their prices.

The oil shocks hurt more at the time

A common factor between the record inflation of the 1970s and 1980s and today is the rapid surge in energy prices.

The 1973 Arab-Israeli war prompted Arab members of OPEC to impose an embargo on oil shipments to the United States that lasted until 1974. And the Iran-Iraq war of 1979 also stifled it. supply.

President Jimmy Carter delivering a speech on the economy and inflation in March 1980.

The limited supply drove prices up. Drivers were hit by a 69% increase in gasoline prices in the early 1980s from the previous year, which was even worse than the 58% annual increase through November of this year. .

This time around, the large percentage increases in oil and gas prices are in part due to comparisons with the very low prices of 2020, when door-to-door orders and widespread temporary job losses created an oil glut and temporarily led to negative oil prices.
These lower prices have prompted producers to cut oil production and some refineries to close. When demand returned this year, tight supply and strong demand combined to drive up prices.
While oil and gas prices are very likely to stay or climb even higher in the coming months, the good news is that the U.S. economy is much less dependent on oil today than it was. 40 or 50 years ago.

The shift from an economy built around energy-intensive industries such as manufacturing to an economy based on service industries has reduced relative dependence on oil.

“One of the most overlooked changes is the reduction in the energy intensity of the US economy,” said Johnston.

Inflation explained: why prices keep rising and who is to blame

Comparing total energy consumption to gross domestic product, the broadest measure of a country’s economic activity, shows that the U.S. economy uses about one-third of the energy per dollar of adjusted economic activity. of the inflation it was making in 1970, and about 44% of what it used when inflation peaked in 1980.

The oil shocks of the 1970s and 1980s drastically reduced oil as a fuel source for power generation to the point where it is well below 1% today. And more importantly, much more fuel efficient cars also limited oil consumption despite driving many miles. This means that Americans spend much less on oil than on other items.

Deregulation

Another big change in the US economy is that the government is much less involved in pricing than it was then.

Deregulation of industries such as telecommunications, airlines and trucking began in part in response to the high prices of the 1970s and 1980s, Johnston said. Government-controlled prices generally limited competition and kept prices and services offered to consumers at an artificially high level.

Although the actual changes to the law did not come into effect until after the destruction of the Inflation Dragon, deregulation has kept the prices of many of these goods and services lower than they used to be. probably would have been otherwise.

Inflation was eventually brought under control, in large part thanks to Federal Reserve Chairman Paul Volcker, who raised the federal funds rate to a record 18.9%, triggering recessions in 1980 and another in 1981- 82. By the end of the second recession, the inflation rate had fallen to 4.5% and would not reach 5% until 1990.

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