NEW YORK — Mark Twain once said that “history doesn’t repeat itself,
but it does rhyme.” That’s worth thinking about when comparing the
current economy to the woes of the 1970s.
As they did three decades ago, surging oil prices are exacerbating
inflationary pressures, further damaging a weak economy. The question
is whether the toxic combination that produced stagflation then,
crippling growth for years, is beginning to play out again today.
Federal Reserve Chairman Ben Bernanke is vowing to prevent that from
happening, insisting the Fed is on the case. “Maintaining confidence in
the Fed’s commitment to price stability remains a top priority as the
central bank navigates the current complex situation,” he said in a
speech earlier this month.
But few Fed watchers are counting on him to back up that talk with action anytime soon.
Most expect the Fed to leave its overnight borrowing rate at the
ultra-low rate of 2 percent at its policy meeting this week. And many
are betting Bernanke won’t act until after the November election,
fearful that an even small dose of tighter monetary policy will slam
the economy and affect the outcome of presidential and congressional
balloting.
Still, even if he waits that long, a case can be made that Bernanke has
a bit of breathing room before runaway inflation could take hold.
For one thing, energy consumption by households and businesses
represents a much smaller percentage of their total income than in the
1970s, so the higher prices aren’t effecting them as badly just yet. At
the same time, productivity is much stronger now and unit labor costs
have barely grown in the last year.
He also has history as a guide about what not to do.
Back then, the OPEC oil embargo sent crude prices soaring from $3.77 a
barrel in May 1973 to above $12 by January 1974. Another price surge
came later in the decade following the Iranian revolution, which pushed
crude prices from around $14 a barrel in 1978 to above $30 two years
later, according to Lehman Brothers.
As inflation rose over that decade to almost a 12 percent annualized
rate — more than three times the annualized rate of 3.6 percent over
the last four years, according to Citigroup — economic growth stunted
and the dollar remained weak. Wage pressures also soared as workers
demanded higher incomes to offset their higher costs.
But the Fed back then was lax in dealing with inflation, continuing to
keep interest rates low to stimulate the economy even as prices
accelerated.
It wasn’t until Paul Volcker took the helm of the Fed in 1979 that the
attack on inflation began. The supply of money and credit were
tightened, and the central bank pushed short-term interest rates as
high as 20 percent. The efforts worked, but the U.S. economy fell into
a deep recession.
Today, Bernanke is up against oil prices tripling over the last four
years, and showing eight-fold gain in the last decade to now trade
around $137 a barrel, according to Citigroup. Those price gains,
coupled with a big upswing in other commodity costs and a steep decline
in the dollar, is beginning to creep into other parts of the economy,
which has been close to stalling in recent quarters.
Last week, the government reported that wholesale prices of finished
goods rose 1.4 percent in May, raising the 12-month increase to 7.2
percent. That matched the findings of a new survey of chief financial
officers at public and private companies, which found that 45 percent
of the 468 respondents said their firms were passing along higher fuel
costs to customers by raising prices, according to the June Duke
University/CFO Magazine survey.
Stagflation worries were on the minds of 87 percent of the more than
200 mutual fund managers surveyed by Merrill Lynch earlier this month,
and that’s causing an alarming number to shift away from owning stocks
and into cash.
Bernanke knows that the public’s perception about inflation means a
lot. That’s why he and other Fed official have been talking about why
this time will be different.
In a speech earlier in June, Bernanke noted that if people expect
higher prices to be temporary and don’t build them into their
longer-term plans for wages and prices, then the inflationary pressures
caused by higher oil prices will fade “relatively quickly.”
Still, indications of longer-term inflation expectations are a
“significant concern” for the Fed, he said. That suggests the Fed
eventually will have to raise borrowing costs even if the economy is
still struggling to pick up speed.
Whether that means a few small steps will work, or if Volcker’s strong
medicine is needed, is still an open question. But the message Bernanke
wants to leave with us is that he is up to the task. Time will tell.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck@ap.org.
