The Wall Street Journal: The Coming Demand Surge Brings Back Memories of 1970s Inflation

Article by William N. Walker in The Wall Street Journal

The last bout of inflation the U.S. experienced was in the 1970s. Commentators duly note this historic reference but don’t really understand it—many weren’t yet born, and few were adults, at the time. It was no mere inconvenience; it was a catastrophe.

During the first quarter of 1973, consumer food prices shot up at an annual rate of nearly 30% and the wholesale price index for farm products rose at an annual rate of 52%. Red-meat prices surged at an annual rate of 90% during the first quarter. Home heating oil prices nearly doubled in that quarter alone, and soybean prices rose to record highs.

There are eerie parallels today. In 1973, the U.S. was coming off a two-year experiment in wage and price controls, which artificially depressed prices and muted signals that the economy was overheating. Then, too, the Fed pursued an easy-money policy, keeping interest rates low—though considerably higher than now, and without today’s purchases of bonds and mortgage securities.

By the end of 1972, before the inflationary jump, the U.S. economy seemed even stronger than it is now, growing at an annual rate of more than 8%. Unemployment was down to 3.4%, and inflation was a seemingly manageable 5.6%. The pre-pandemic 2020 U.S. economy was also very strong, growing at a 3% annual rate, with historically low unemployment of under 4% and inflation hovering around only 1%.

Today’s Fed policies are even more expansive. And Congress has just enacted a $1.9 trillion stimulus bill—on top of earlier relief bills costing another nearly $2 trillion.

As was the case 50 years ago, there are constraints on supplies: shipping delays are blocking deliveries; manufacturers can’t get parts to ramp up production; real-estate values are skyrocketing, while lumber shortages constrain home building; and most commodity prices are rising precipitously. Experts reassure us that the annual inflation rate will rise only to about 2%. We hope they’re right, but when demand increases faster than supply, prices tend to go up.

Inflation may be in check today. But once it gets its claws into a demand-fueled, supply-constrained economy, it can become a scourge, and history teaches that .....

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