Stagflation in the 1970s

Until the 1970s, many economists relied on a stable inverse relationship between inflation and unemployment. Data collected since the 1860s suggested unemployment fell as inflation rose and rose when inflation fell.

During economic expansion, demand was expected to drive up prices, encouraging businesses to grow and hire additional employees. During a recession, lower demand would lead to unemployment, cap price increases, and lower inflation. The stagflation of the 1970s, a combination of slow growth and rapidly rising prices, challenged prior assumptions, leading economists to examine the causes and policies that would end the stagnant period.

The 1970s saw growing federal budget deficits boosted by military spending during the Vietnam War, Great Society social spending programs aimed at fighting poverty, and the collapse of the Bretton Woods agreement. These issues were compounded by a tripling in crude oil prices as a result of the Arab oil embargo, followed by a near-tripling at the decade’s end as the U.S. embargoed oil from Iran. In November 1979, the price of West Texas Intermediate crude oil surpassed $100 per barrel in 2019 dollars, peaking at $125 the following April. That price level would not be exceeded for 28 years.

Soaring energy prices fueled a wage-cost price spiral and widespread price hikes across the full spectrum of economic activity. Frequent recessions raised unemployment without cooling inflation. The Federal Reserve focused on propping up growth and was powerless to tame soaring prices. Faced with external economic shocks, policymakers allowed inflation expectations to settle in, discouraging investment.

Unemployment exceeded standards set in two prior decades, and growth was uneven. The economy was in recession from December 1969 to November 1970 and again from November 1973 to March 1975. When not in a recession, the economy often grew with real Gross Domestic Product (GDP) growth above 5 per cent in 1972-73 and mostly above 5 per cent in 1976-78, ahead of oil price shocks that would curb growth while fueling inflation.

High inflation and uneven economic performance soured the national mood. In November 1979, only 19 per cent of Americans were satisfied in the U.S., compared with 22 per cent in April 2022, according to a Gallup survey. Americans’ satisfaction with the national trend in this poll peaked at 71 per cent in 1999. In the 1970s, lower living standards and declining confidence in economic policy were commonplace.

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