Anybody who remembers the 1970s remembers the Great Inflation, when retirees on fixed incomes struggled to make ends meet.

They probably also remember what happened next, when the Federal Reserve under Paul Volker tightened the money supply, driving down prices by driving down the economy, forcing two recessions that lowered consumer spending and increased unemployment.

Federal Reserve Chair Jerome Powell faces calls to raise interest rates to cool demand and inflation. That would be a mistake. Al Drago/The New York Times via AP, pool

For the last four decades, inflation has been not much more than a bad memory for most people. This year, however, it has reappeared as a cause for concern. Fear of a return to 1970s-style inflation is driving calls for a retreat from the free-spending goals of the Biden administration, which some Republicans claim have overheated the economy.

They are calling for Federal Reserve Chairman Jerome Powell to do what Volker did, and raise interest rates to cool demand. That would be a mistake.

The circumstances driving this economy are much different from those in the 1970s, and the kind of inflation that persisted then is not likely to come back.

Powell is right to reassure lenders that he’ll take action if inflation spirals out of control, but we are nowhere near that point. Reining in the economy too soon would unnecessarily hurt lower-wage workers at a point when the recovery is finally showing signs of reaching them.

Inflation is measured by the Department of Labor, which tracks over time the prices of a list of goods and services it considers typical for an urban family’s budget. The department expresses the overall change in prices with one number, the Consumer Price Index.

Earlier this month, the department reported that CPI has risen 5.4 percent over the previous 12 months, the greatest one-year increase since the period that ended in August 2008.

CPI is just one number, but that doesn’t mean that all prices increased equally. The 5.4 percent annual increase includes a 2.4 percent increase in food prices, 4.9 percent increase in apparel and a 24 percent increase in energy costs.

That is driven by a 45 percent increase in the cost of gasoline, which is what you might expect following 2020, a year when lockdowns and layoffs cut demand for gas.

This is very different from what happened to gas prices in the 1973-74, when an embargo by the Organization of Petroleum Exporting Countries cut off supply, driving up prices – not by 40 percent but by 400 percent, bringing on a prolonged energy crisis.

Most prices in the June report are increasing moderately, as should be expected in an economy where people have pent up demand and maybe some money that they didn’t spend last year. A glaring exception is the price of used cars and trucks, which shot up 45 percent over the previous year, but that also seems to be a COVID phenomenon.

Car makers scaled back production at the start of the pandemic and reduced their orders for parts. When demand for new cars rebounded last fall, there wasn’t enough inventory to meet it.

Now the automakers can’t get the semiconductor chips they need to build a modern car because the chip makers moved to other product lines when demand shifted.

That crunch is starting to ease now, and even though it will take time for new car production to scale up, the price of used cars is already dropping.

As we saw during the pandemic with toilet paper, two-by-fours and chicken wings, small changes in behavior by large numbers of people can shock the system. But markets have an ability to respond.

We are still climbing out of a very unusual recession, and there are bound to be more surprises ahead. But like double-knit leisure suits, 1970s-style inflation is probably not making a comeback.


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