Think Inflation Is Bad Now? Let's Take A Step Back To The 1970s

President Jimmy Carter signs emergency natural gas legislation in the Oval Office of the White House in Washington, D.C., on Feb. 2, 1977. An oil crisis contributed to a period of double-digit inflation in the 1970s. AP hide caption

President Jimmy Carter signs emergency natural gas legislation in the Oval Office of the White House in Washington, D.C., on Feb. 2, 1977. An oil crisis contributed to a period of double-digit inflation in the 1970s.

The 1970s are starting to trend – for all the wrong reasons.

Today, prices for everything from gasoline to groceries are surging as the economy roars back from the pandemic recession. And that's raising concerns in some quarters about whether the United States is headed back to the awful economic days of the 1970s, when the country was gripped by double-digit inflation that required painful action by the Federal Reserve.

The Biden administration insists those concerns are far off the mark, and that the days when Americans sported campaign-style "Whip Inflation Now" buttons on their wide lapels are long gone.

"I came of age and studied economics in the 1970s and I remember what that terrible period was like," Treasury Secretary Janet Yellen told a House subcommittee Thursday. "No one wants to see that happen again."

Yellen and others in the administration argue that the current run-up in prices is a temporary phenomenon, sparked by supply shocks tied to the pandemic, and pent-up demand from consumers — not the beginning of a persistent, upward spiral like the one that spawned "stagflation" in the '70s and haunted presidents from Richard Nixon to Jimmy Carter.

To understand the differences between the two eras, it helps to take a step back in time.

The 1970s were bookended by oil shocks that brought soaring prices for gasoline. Meat prices also spiked. On the popular sitcom All In The Family, Archie Bunker was reduced to eating meatless spaghetti.

In this Dec. 23, 1973 file photo, cars line up in two directions at a gas station in New York City. The 1970s was a period defined by devastating double-digit inflation, requiring drastic action from the Federal Reserve. Marty Lederhandler/AP hide caption

In this Dec. 23, 1973 file photo, cars line up in two directions at a gas station in New York City. The 1970s was a period defined by devastating double-digit inflation, requiring drastic action from the Federal Reserve.

Prices actually started creeping up in the mid-1960s, when the federal government was spending heavily on both the Vietnam War and the Great Society. Nixon temporarily froze prices in the early 1970s, but that just postponed the pain. When his controls were lifted, prices bounced even higher.

Gerald Ford declared inflation "Public Enemy Number One." Carter called it the nation's most pressing domestic problem.

Despite the tough talk from the White House, prices kept climbing.

Princeton economist Alan Blinder says psychology was partly to blame. In the 1970s, Americans came to believe that high inflation was here to stay. And that expectation became a kind of self-fulfilling prophesy.

"If you're a business and you expect the inflation rate to be 5%, you're likely when it comes time to set the prices for the next year [to] go up 5%," said Blinder, who was vice chairman of the Federal Reserve in the 1990s.

"On the other hand, if you think inflation is going to be 1%, you're more likely to go up 1%," he added.

Ultimately, it took a crackdown by cigar-chomping Fed chairman Paul Volcker to break the cycle of rising prices and wages. Volcker slammed the brakes on the economy by raising interest rates to 20% — tough medicine to prove he was serious about getting inflation under control.

"At some point this dam is going to break and the psychology is going to change," Volcker told the MacNeil/Lehrer NewsHour.

Paul Volcker, then undersecretary of the Treasury for monetary affairs, is pictured at a news conference in Washington, D.C. on Feb. 10, 1972. As Federal Reserve Chairman, Volcker sharply raised interest rates to cut down on double-digit inflation. Harvey Georges/AP hide caption

Paul Volcker, then undersecretary of the Treasury for monetary affairs, is pictured at a news conference in Washington, D.C. on Feb. 10, 1972. As Federal Reserve Chairman, Volcker sharply raised interest rates to cut down on double-digit inflation.

It worked. By 1983, inflation had retreated to just over 3%.

It was a painful correction. Nearly 4 million people lost jobs in back-to-back recessions in the early 1980s. But for the last four decades, inflation has not been a serious problem in the U.S.

But now, some are sounding alarms. The Labor Department's consumer price index surged to 4.2% in April — the highest since Sept. 2008.

There are, however, key differences from the 1970s — including a change in expectations.

"If people believe that prices will be pretty stable, then they will be — because they won't ask for very high wage increases and people who sell things won't be asking for high price increases," Fed chairman Jerome Powell told Morning Edition. "Once that psychology sets in, it tends to perpetuate itself."

Blinder agrees the decades of stable prices since the 1970s should help to prevent another inflationary spiral in the future.

"I think the generation that were adults in that high-inflation period will always remember it," Blinder said. "But there are a lot of Americans that never lived with inflation at all. So naturally, they don't expect it."

Both the White House and the central bank are on the lookout for any signs that expectations are shifting – and they say a return to runaway inflation is as unlikely as a comeback for mood rings and bell-bottom jeans.

Correction May 29, 2021

A photo caption that appeared earlier with this story mistakenly said former Federal Reserve chairman Paul Volcker sharply raised prices to control inflation. He raised interest rates.