Inflation, here is the comparison between today and the sixties / seventies

 by Michael Bazdarich

The analysis by Michael Bazdarich, Economist and Product Specialist at Western Asset, part of the Franklin Templeton Group

Currently in the US inflation is at the highest levels since the late 60s / early 70s. However, today's context has some important differences from that period. Today inflation has risen without there being a real growth boom in the United States, 55 years ago it did not go that way. At the moment, wages and real incomes are also falling, a trend absent at the time of the surge in inflation in the 60s. Moreover, currently the gap between the price increases in goods and services appears wider than in the 60s and 70s, a sign that in the 60s inflation was monetary in nature while today it is fueled by restrictions on the supply side.

The party of the 60s vs the shipwreck of the 2020s

In the 60s William McChesney Martin, Chairman of the Federal Reserve (Fed), used the metaphor: "to take away the punch bowl just as the party gets going", still famous today. He meant that it was the Fed's job to intervene just as economic growth began to gain momentum and inflationary pressures were increasing in order to cool growth and prevent these pressures from becoming persistent and generalized.

The success of McChesney Martin or his successor in the '70s as Fed Chairman is debatable, but the metaphor itself is accurate. And it seems that current Fed Chairman Jerome Powell intends to follow McChesney Martin's lead. In any case, there is a problem: in the 60s, when inflation began to rise, the US economy was going through a phase of "euphoria", but today the climate is much less optimistic.

After the brief recession of 1960-1961 – probably triggered by the outcome of the 1960 election – early 1961 saw the inauguration of the Kennedy-Johnson administration, determined to boost economic growth and bring down unemployment. The economy was already re-emerging from recession, so fiscal stimulus policies triggered an accelerated expansion.

From the peak of the cycle in the first quarter of 1960 until the fourth quarter of 1965, real GDP (gross domestic product) growth – net of recession-related declines offset by growth in the early stages of recovery – stood at an average of 4.9% per annum. Unemployment rose from 5.2% in April 1960 (at the height of the expansion) to 4.0% in December 1965.

In any case, there was a substantial acceleration in economic growth in the US and it is no coincidence that inflation began to rise in 1965. After averaging 1.2% between 1960 and 1964, inflation rose to 1.9% in 1965 and then soared in 1969. Later, the Fed, under the leadership of McChesney Martin, lived up to its mandate and began to pull the brakes. However, central bank policy was rejected by President Lyndon Johnson, who focused on the 1968 election and financing the Vietnam War. The removal of the constraints imposed by the Fed and accommodative federal policies have resulted in a rapid recovery in global growth.

Despite the deceleration due to the Fed's temporary credit crunch, from the fourth quarter of 1965 until the peak of expansion in the third quarter of 1969, real GDP growth averaged 3.9% per year, and even in the previous five years growth had been extremely high. Unemployment fell again to 3.5% despite the mass influx of baby boomers into the labor market.

In 1969, CPI inflation stood at over 6%. Not even the Johnson administration could stop the Fed from addressing the problem. As a result, the US economy entered a recession at the end of 1969. Later there was a much weaker growth than in the 60s.

One thing is certain, before inflation became a hot topic in the late 60s, the U.S. economy had marked the most sustained expansion phase since the beginning of the surveys as shown by the average GDP growth of 4.5% in the nine and a half years from the peak of the cycle in the first quarter of 1960 to the peak of the cycle of the third quarter of 1969. By way of comparison, peak-to-peak economic growth in the more than seven years of the previous two cycles in the 50s averaged 2.8%.

Leaving aside the statements of politicians, today the growth of the US economy is not even remotely comparable to the surge of the 60s. All things considered, today's expansion is even slower than the much-maligned expansion after the global financial crisis (CFG). At the same time, last year, when inflation began to rise, unemployment was still well above the  pre-COVID-19 period.

Of course, in the third quarter of 2020 GDP growth was very strong. However, this expansion phase came after the second quarter of 2020 when the contraction in GDP had been significant. Even now, six quarters later, economic growth trends are not those of the pre-pandemic period  . If we balance the recessionary and expansionary phases, a bit like in the 60s, real GDP growth averages a measly 1.2% in the fourth quarter 2019-first quarter 2022 period. By way of comparison, even adding the severe recession during the CFG to the shaky post-CFG recovery results in average real GDP growth of 1.7% per year from peak to peak between the second quarter of 2008 and the fourth quarter of 2019.

As for unemployment, at the end of 2019, just before the outbreak of the COVID-19 pandemic, it was at 3.5% in the presence of stable inflation. At the end of 2021, coinciding with the acceleration of inflation, it stood at 4.7% and since then the contraction has been modest, to 3.6% – a slightly higher level than in December 2019.

In summary, in the 60s, inflation had only begun to rise after more than five years of much faster growth and much lower unemployment than before. Today, however, the price increases have occurred after only one year characterized by growth that is still insufficient to recover the losses due to the recession triggered by the COVID-19 pandemic and a higher unemployment rate than that of the pre-recession period  . This time there is nothing to celebrate.