Published by FOX Business | May 20, 2022
Stagflation is the combination of economic stagnation and high inflation, characterized by soaring consumer prices as well as high unemployment.
Soaring consumer prices, supply chain shocks, rising energy costs and a hawkish Federal Reserve determined to bring inflation under control: These are the worrisome attributes of the U.S. economy that have some experts sounding the alarm over a possible return to 1970s-style “stagflation.”
Stagflation is the combination of economic stagnation and high inflation, characterized by soaring consumer prices as well as high unemployment.
The phenomenon ravaged the U.S. economy in the 1970s and early 1980s, as spiking oil prices, rising unemployment and easy monetary policy pushed the consumer price index as high as 14.8% in 1980, forcing Fed policymakers to raise interest rates to nearly 20% that year.
A telltale sign, and consequence, of stagflation is rising energy prices, according to many economists, who believe it occurs when a sudden increase in the cost of oil reduces an economy’s productive capacity. For instance, in 1973, the Organization of Petroleum Exporting Countries imposed an embargo on oil supplies to the U.S. over its support for Israel.
The onset of the embargo exacerbated an upward spiral in oil prices, with the price per barrel doubling and then quadrupling. Rising oil costs imposed sky-high costs on consumers, who were forced to confront long lines at gas stations and rationing measures like “odd-even” purchases by license place number.
It was a major shock for an economy that had become reliant on cheap, foreign oil.
Although the crisis seemed to fade with the removal of the oil embargo in 1974, the relief was temporary: The Iranian revolution brought on a second wave of dramatically high prices in 1978-1979.
Some economists believe the U.S. economy is showcasing signs of “stagflation” today, after the Russian invasion of Ukraine sent oil prices soaring. Although gas prices moderated slightly in April, they have returned – and surpassed – the highs recorded in March.
