The US economy, however, is in a very different place than it was in the 1970s, the Times columnist Paul Krugman argues. While inflation was deeply entrenched at the beginning of the 1980s, “the public now expects high inflation for the near term but a return to normal inflation after that,” he writes. “Financial markets, where you can extract implied inflation expectations from the spread between yields on bonds that are and aren’t indexed to consumer prices, are telling the same story: inflation today but not so much tomorrow.”
Ben Bernanke, who presided over the Federal Reserve during the Great Recession (another moment of heightened stagflation fears), agrees. Unlike President Biden, Presidents Johnson and Nixon put a great deal of pressure on the Federal Reserve to refrain from taking any economy-slowing measures that might reduce inflation for fear of blowback from the electorate.
Today, Bernanke argues, the Fed is a much more independent institution with a better understanding of how inflation works and what it can do to control it: “In short, the lessons learned from America’s Great Inflation, by both the Fed and political leaders, make a repeat of that experience highly unlikely.”
What to watch out for
The Federal Reserve’s plan to slow the surge in consumer prices won’t have to cause stagflation or a full-blown recession for average Americans to feel squeezed. Earlier this month, the chief executive of JPMorgan Chase warned that an economic “hurricane” was on the horizon. “We just don’t know if it’s a minor one or Superstorm Sandy,” he said, but “you better brace yourself.” Against what?
Amid a national affordable housing shortage, steeper mortgage rates are likely to drive the cost of homeownership even higher in the near term, pushing people who might otherwise buy into overheated rental markets. And higher rents could in turn sustain high inflation, Lisa Abramowicz notes at Bloomberg.
By increasing the cost of corporate borrowing, interest rate raises slow business growth and drive up unemployment. This week, former Treasury Secretary Larry Summers said that to get inflation under control, the unemployment rate would need to rise above at least 5 percent, from 3.6 percent today. “To state the obvious,” the Washington Post economics reporter Jeff Stein tweeted“a 5% unemployment rate would mean devastating joblessness for millions of poor American workers.”
With higher unemployment comes reduced leverage for workers in the labor market, which could cause wage growth to slow even as it has failed to keep pace with inflation. “The transition is going to be very difficult,” Seth Carpenter, the global chief economist at Morgan Stanley and a former Fed economist, told The Times. “At least historically, it takes a really long time for inflation to come down, even after the economy slows.”
Some economists say the White House and Congress should be doing more to bring inflation down faster and cushion the blow to average Americans. Michael R. Strain of the American Enterprise Institute, for example, believes that Biden should finally roll back the Trump administration’s tariffs on Chinese goods, which, in combination with other trade liberalization policies, could reduce inflation by as much as 2 percentage points.
While Biden is reportedly considering asking Congress to suspend the federal gas tax to bring down its price by 18.4 cents per gallon, Claudia Sahm, a former Fed economist and contributing Times Opinion writer, argues that it’s a “somewhat gimmicky” idea that doesn’t address the problem at the root. Instead, she believes the administration should write contracts with domestic oil producers with a minimum price guarantee to encourage production, which would lower the price of gas in the near term, while Congress should pass legislation to expedite the renewable energy transition, which would reduce the country’s dependence on fossil fuels in the longer term.
“The Fed cannot print oil or wheat,” Sahm writes. “If the Fed alone fights inflation, people will suffer.”