Worry grows about a return to the stagflation of the 1970s in the U.S.
Stagflation. It was the dreaded “S word” of the 1970s.
For Americans of a certain age, it conjures memories of painfully long lines at gas stations, shuttered factories and President Gerald Ford's much-ridiculed “Whip Inflation Now” buttons.
Stagflation is the bitterest of economic pills: High inflation mixes with a weak job market to cause a toxic brew that punishes consumers and befuddles economists.
For decades, most economists didn't think such a nasty concoction was even possible. They'd long assumed that inflation would run high only when the economy was strong and unemployment low.
But an unhappy confluence of events has economists reaching back to the days of disco and the bleak high-inflation, high-unemployment economy of nearly a half century ago. Few think stagflation is in sight. But as a longer-term threat, it can no longer be dismissed.
This past week, the World Bank raised the specter of stagflation in sharply downgrading its outlook for the global economy.
“The world economy is again in danger,” the anti-poverty agency warned. “This time, it is facing high inflation and slow growth at the same time . ... It's a phenomenon — stagflation — that the world has not seen since the 1970s.”
And last month, Treasury Secretary Janet Yellen invoked the word in remarks to reporters:
“The economic outlook globally,” Yellen said, “is challenging and uncertain, and higher food and energy prices are having stagflationary effects, namely depressing output and spending and raising inflation all around the world.”
The government estimates that the economy shrank at a 1.5% annual rate from January through March. But the drop was due mostly to two factors that don't reflect the economy's underlying strength: A rising trade gap caused by Americans' appetite for foreign products and a slowdown in the restocking of businesses inventories after a big holiday season buildup.
For now, economists broadly agree that the U.S. economy has enough oomph to avoid a recession. But the problems are piling up. Supply chain bottlenecks and disruptions from Russia's war against Ukraine have sent consumer prices surging at their fastest pace in decades.
The Federal Reserve and other central banks, blindsided by raging inflation, are scrambling to catch up by aggressively raising interest rates. They hope to cool growth enough to tame inflation without causing a recession.
It's a notoriously difficult task. The widespread fear, reflected in shrunken stock prices, is that the Fed will end up botching it and will clobber the economy without delivering a knockout blow to inflation.
Former Fed Chair Ben Bernanke last month told The New York Times that “inflation's still too high but coming down. So there should be a period in the next year or two where growth is low, unemployment is at least up a little bit and inflation is still high.”
And then Bernanke summed up his thoughts: “You could call that stagflation.”
What is stagflation?
Mark Zandi, chief economist at Moody's Analytics, defines stagflation this way: Stagflation arrives in the United States, he says, when the unemployment rate reaches at least 5% and consumer prices have surged 5% or more from a year earlier. The U.S. unemployment rate is now just 3.6%.
Until about 50 years ago, economists viewed stagflation as a nearimpossibility. They believed that inflation and unemployment move in opposite directions.
Somehow, reality hasn't proved so straightforward. What can throw things off is a supply shock — say, a surge in the cost of raw materials that ignites inflation and leaves consumers with less money to spend to fuel the economy.
Which is exactly what happened in the 1970s.
Saudi Arabia and other oil-producing countries imposed an oil embargo on the United States and other countries that supported Israel in the 1973 Yom Kippur War. Oil prices jumped and stayed high. The cost of living grew more unaffordable for many. The economy reeled.
Enter stagflation. Each year from 1974 through 1982, inflation and unemployment in the United States both topped 5%. The combination of the two figures, which came to be called the “misery index,” peaked at a most miserable 20.6 in 1980.
Stagflation, and especially chronically high inflation, became a defining feature of the 1970s.
Today, inflation has arrived, but “stag” has yet to hit. Even though the government reported Thursday that economic output shrank from January through March, the nation's job market has kept roaring. At 3.6%, the unemployment rate is just a notch above 50-year lows. The Fed last month reported that Americans are in solid financial health: Nearly eight in 10 adults said last fall that they were “doing okay or living comfortably” — the highest proportion since the Fed started asking the question in 2013.
Still, the risks are accumulating. Fed Chair Jerome Powell acknowledged last month that the central bank might not be able to achieve a soft landing and dodge a recession. He worries about “factors that we don't control” — the Ukraine war, a slowdown in China and the lingering pandemic.