A Nice Inflation Redux? Economists Level to Large Variations.


“It made me feel déjà vu because that’s what we did in the 1970s – we were trying to create supply-side effects,” said Barry P. Bosworth, senior fellow at the Brookings Institution who chaired the wage and salary council Price stability under President Jimmy Carter. Efforts to control headline inflation have failed, he said.

“It doesn’t work,” he said. “As a macro guideline, you cannot try to stick your finger in the dike wherever it appears.”

The major price spikes in the 1960s and 1970s were reversed when the conditions that caused them waned. But not quite – the inflation rate was in any case slightly higher than in the previous period. Many economists believe the pattern has to do with human psychology: workers and companies expected a higher rate of inflation and adjusted their behavior accordingly, creating a self-sustaining cycle.

Economists particularly highlight the role of wages. Businesses can bring prices down just as easily as they can raise, but wage cuts are more difficult. No worker wants to be told that a job that was worth $ 10 an hour yesterday is worth $ 9.50 an hour today. And if workers expect prices to rise 5 percent a year, they will want price increases to keep up with inflation.

Most economists believe that these are the forces driving the current surge in inflation will ease in the coming months. The question is, will that happen before expectations change? Some surveys have shown that consumers are already starting to expect faster inflation, although this evidence is mixed. Wages have also continued to rise as employers struggle to reinstate workers, although it is not yet clear that they are taking off.

One reason why temporary price increases became permanent wage increases in the mid-20th century is that many union agreements contained sliding clauses that linked wage increases directly to inflation. These provisions have effectively helped curb price hikes and fuel the price spiral, said David Card, an economist at the University of California, Berkeley who has studied the role of union contracts in inflation. Far fewer workers are union members today, and few contracts have inflation clauses, in part because they were unnecessary in a period of low inflation.

Perhaps the biggest difference of all? Time. In the 1960s, it took years of price spikes and policy failures before Americans lost confidence that their leaders could keep inflation under control.

“It took almost 10 years to develop in the 1970s,” Card said. “I don’t think it’s so feasible that it can happen that quickly.”