When was stagflation at its worst

The two root causes of stagflation economists generally agree upon are supply shocks and fiscal and monetary policies. A supply shock is anything that reduces the economy's capacity to produce goods and services at given prices. For example, throughout the pandemic, there have been supply shocks in:.

Poor fiscal and monetary decisions also prompt stagflation. The trifecta of slow growth, high unemployment, and fast inflation puts significant pressure on the economy. For households, stagflation means people are earning less money while spending more on everything from food and medicine to housing and consumer products. As consumer spending slows, corporate revenue declines, exacerbating the overall effect on the economy.

By the late s, the post-World War II economic boom began to fade. As the US faced greater international competition, a drop in manufacturing jobs, and a massively expensive war in Vietnam, unemployment rates and inflation climbed. Then, in , former president Richard Nixon undertook a series of measures intended to create better jobs, remedy inflation, and protect the US dollar:. Now known as the "Nixon Shock," these moves ultimately became the primary catalyst for the stagflation of the s.

Federal Reserve attempts to fight stagflation using monetary policy only worsened it. Between and , the Federal Reserve raised the federal funds rate to fight inflation, then lowered it to fight the recession.

Conversely, during the financial crisis, high debt ratios private and public caused a severe debt crisis — as housing bubbles burst — but the ensuing recession led to low inflation, if not outright deflation. Owing to the credit crunch, there was a macro shock to aggregate demand, whereas the risks today are on the supply side. We are thus left with the worst of both the stagflationary s and the period. Debt ratios are much higher than in the s, and a mix of loose economic policies and negative supply shocks threatens to fuel inflation rather than deflation, setting the stage for the mother of stagflationary debt crises over the next few years.

For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles, propelling a slow-motion train wreck. At some point, this boom will culminate in a Minsky moment a sudden loss of confidence , and tighter monetary policies will trigger a bust and crash. But in the meantime, the same loose policies that are feeding asset bubbles will continue to drive consumer price inflation, creating the conditions for stagflation whenever the next negative supply shocks arrive.

Such shocks could follow from renewed protectionism; demographic ageing in advanced and emerging economies; immigration restrictions in advanced economies; the reshoring of manufacturing to high-cost regions; or the Balkanisation of global supply chains.

More broadly, the Sino-American decoupling threatens to fragment the global economy at a time when climate change and the Covid pandemic are pushing national governments toward deeper self-reliance.

The Nixon Shock was comprised of three actions that Nixon took. Under Bretton Woods, most countries agreed to peg the value of their currencies to either the price of gold or the U. That had turned the dollar into a global currency. The United States didn't have that much gold in its reserves at Fort Knox.

So Nixon stopped redeeming dollars for gold. That sent the price of the precious metal skyrocketing and the value of the dollar plummeting which sent import prices up even more. These last two policies raised import prices, which slowed growth. Then growth slowed even more because U. Since they couldn't lower wages either, the only way to reduce costs was to lay off workers. That increased unemployment. Unemployment reduces consumer demand and slows economic growth. In other words, Nixon's three attempts to boost growth and control inflation had the opposite effect.

Learning the history of the gold standard will help you understand why the dollar then was backed by gold and why it isn't currently. The Federal Reserve's attempts to fight stagflation only worsened it.

Between and , it raised the fed funds rate to fight inflation, then lowered it to fight the recession. This "stop-go" monetary policy confused businesses. They kept prices high, even when the Fed lowered rates. That sent inflation up to But it was at a high cost. It created the recession. In , people became concerned about stagflation again. They worried that the Fed's expansive monetary policies , used to rescue the economy from the financial crisis, would cause inflation.

At the same time, Congress approved an expansive fiscal policy. It included the economic stimulus package and record levels of deficit spending. People warned of the risk of stagflation if inflation worsened and the economy didn't improve. This massive increase in global liquidity prevented deflation, a far greater risk.

If inflation rose above that target, the Fed would reverse course and institute constrictive monetary policy. First, the Fed no longer practices stop-go monetary policies. Instead, it commits to a consistent direction.

Second, the removal of the dollar from the gold standard was a once-in-a-lifetime event. Third, the wage-price controls that constrained supply wouldn't even be considered today. Mentions of "stagflation" across company documents are at their highest level since , data company FactSet found, even before third-quarter earnings season picks up. Bank analysts are churning out research notes on the topic.

Central banks have spent most of the last year saying inflation should soon fade away, but they've sounded less confident of late. On top of "temporary" inflation that is looking more permanent, the Delta coronavirus wave has slowed the roaring growth from earlier this year.

The US jobs market slowed dramatically in both August and September. Supply crunches have led to surging energy prices, causing some factories in China and Europe to stop production. For many on Wall Street, talk of stagflation sends shivers down the spine, bringing back bad memories of the s.

It's no accident the '70s was the decade to give birth to gritty films like "Taxi Driver" and aggressive music like punk rock. The economies and societies of the developed world were convulsed by the perfect storm of high unemployment and rocketing prices that decade. It was a shock after two decades of relative calm and prosperity after World War II, when governments actively managed their economies to try to keep unemployment low. After the deflation of the s and the Great Depression , they were happy to tolerate price rises if it meant the jobs market was healthy.

The US and global economies went through a recession as oil prices surged and Richard Nixon changed the rules of international finance by unpegging the dollar from gold , which had been the bedrock of the financial system since the end of World War II.

Despite slowing growth, inflation spiralled out of control, with price rises in the US soaring into double digits by the end of the decade.