Memories of the 70s: US inflation specter peeps around the corner


Memories of the 70s
US inflation specter peeps around the corner

The economy is picking up speed again, but the US is still miles away from full employment. The catch-up process is slow and a price surge is fueling fears. The Fed never tires of appeasing sentiments – but the job crisis and inflation are a treacherous combination.

An army of millions of unemployed, rising inflation and queues at the petrol pumps: memories of the 1970s are currently being awakened in the USA, which were marked by similar problems. The causes are different today than they were then, not least because of the corona pandemic. But a few months after President Joe Biden took office, the alarm sirens are likely to sound in the White House, especially since the growth fantasies triggered by the trillion dollar economic injections were dampened last month by poor economic data: “If there is still a month like April, there is cause for concern” , warns chief economist Gregory Daco of the research firm Oxford Economics.

There are still around 7.5 million jobs missing compared to the time before the outbreak of the corona crisis. If progress in job creation continues to be sluggish, as last month, it could take years for the job market to recover: the mid-term elections to the US Congress will be held in November 2022, which Biden’s Democrats will be interested in to hold their majorities in both chambers of parliament. As a chilling example, Biden is likely to have the political fate of one of his predecessors in mind: The Democratic head of state Jimmy Carter, who was borne by a wave of popularity at the beginning of his term in office in the second half of the 1970s, finally suffered a crushing defeat in the presidential elections in 1980 because he hadn’t gotten inflation and unemployment under control.

Consumers are unsettled

Even if the economy has picked up speed again, the US is still miles away from full employment. The catch-up process slowed significantly in April. Instead of the expected around one million jobs, only 266,000 were created. May could also be a disappointment in this direction. UKG, a company active in human resources, warns against excessive expectations of the job data: “We should be prepared for another month with a rather moderate increase in the number of jobs,” says UKG Vice President Dave Gilberston. It could even take until the end of September for job creation to really pick up speed and for citizens to gradually begin to tick off the crisis.

In addition to job concerns, the specter of inflation in the USA is now peeking around the corner: A surprisingly large price surge of 4.2 percent in April sparked fears that developments were getting out of hand. The US Federal Reserve does not tire of declaring the increase as temporary and therefore largely harmless. According to this, there is a statistical effect behind this, since the economy went to its knees in spring 2020 and the comparison with the same month last year gives a correspondingly distorted picture.

And the latest rise is nowhere near to be compared with inflation, which was reached in 1980 with a value of almost 14.5 percent. Nevertheless, consumers are feeling insecure. Their mood has suffered a crack, according to the latest survey data from the University of Michigan – combined with the highest inflation expectations in more than a decade. Citizens therefore assume that the annual rate of inflation will rise to 4.6 percent this year and will likely settle above the three percent mark in the next few years.

White House relies on Fed toolbox

According to Michigan economist Richard Curtin, in the face of skyrocketing timber prices, consumers have no longer seen buying conditions for houses since the early 1980s – another worrying parallel for Biden at the time of Carter. And queues at the petrol pumps, as most recently on the east coast, had already been seen in 1979/80, when the second oil crisis triggered by the Islamic Revolution in Iran hit the USA and drove up gasoline prices. The fact that 80 percent of the petrol stations in Washington reported empty pumps last weekend was not due to geostrategic reasons, but was due to a hacker attack on one of the most important fuel pipelines in the USA. So at least one of the three problems that plagued Carter at the time could soon be resolved for Biden.

And as far as the job market and inflation are concerned, according to a top official, the White House relies on “the well-stocked toolbox” of the Fed, which can effectively counter the dangers. Fed Chairman Jerome Powell has emphasized that there will be no going back to the “bad old days” of the 1970s, despite the wide-open money locks on inflation.

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