Inflation: What Today’s U.S. Economy Has in Common with the 1960s

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“It gave me a sense of deja vu, because that’s what we did in the ’70s – we were trying to get supply side effects,” said Barry P. Bosworth, a senior fellow at the Brookings Institution. Wage and Price Stability under President Jimmy Carter. He said efforts have failed to contain overall inflation.

“It’s not working,” he said. “As a macro policy, you can’t go around trying to get your finger on the set wherever it pops up.”

The massive price increases of the 1960s and 1970s reversed as the underlying conditions that created them eased. But not entirely – in any case, the inflation rate was slightly higher than the previous time. Many economists believe the pattern has to do with human psychology: Workers and businesses came to expect a higher rate of inflation and adapted their behavior accordingly, creating a self-sustaining cycle.

Economists particularly emphasize the role of wages. Businesses can lower prices as easily as they can raise them, but lowering wages is more difficult. No worker wants to be told that a job that was $10 an hour yesterday is only worth $9.50 an hour today. And if workers expect prices to rise 5 percent a year, they will want a raise to keep up with inflation.

Most economists believe that there are forces driving the current rise in inflation. will ease in the coming months. The question is whether this will happen before expectations change. Some surveys They found that while the evidence is mixed, consumers are beginning to anticipate that inflation will stabilize faster. There are also fees continued to rise Employers are struggling to rehire workers, but it’s not yet clear whether they’re back in business.

One reason temporary price increases turned into permanent wage increases in the mid-20th century is that many union contracts have escalator clauses that directly link wage increases to inflation. Economist David Card of the University of California at Berkeley said these provisions effectively help lock in price increases and feed the price spiral. The role of union contracts in inflation. Far fewer workers are union members today, and very few contracts have inflation provisions, in part because they are not necessary in a period of low inflation.

Perhaps the biggest difference? Time. In the 1960s, it took years of price hikes and policy failures, as Americans lost confidence that their leaders could keep inflation in check.

“What happened in the 70s took almost 10 years to develop,” Mr. Card said. “I don’t think it’s possible that it will happen that quickly.”

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