May 24, 2022

Economists voice concern over potential ‘stagflation’ event

Economists warn that the current inflation level could lead to a 1970s-style catastrophe, according to a report by Fox Business News.

The article cited soaring consumer prices, supply chain shocks, rising energy costs as well as moves by the Federal Reserve as some of the key issues facing the greater U.S. economy.

“Stagflation is the combination of economic stagnation and high inflation, characterized by soaring consumer prices as well as high unemployment,” Fox Business reported.

In the 1970s and early 1980s, there was a similar phenomenon as oil prices rose along with unemployment and “easy monetary policy” that caused the consumer price index to climb to almost 15% and forced the Fed to raise interest rates by almost 20%.

“A telltale sign, and consequence, of stagflation is rising energy prices, according to many economists, who believe it occurs when a sudden increase in the cost of oil reduces an economy’s productive capacity,” Fox Business reported.

“For instance, in 1973, the Organization of Petroleum Exporting Countries imposed an embargo on oil supplies to the U.S. over its support for Israel.”

That embargo caused the upward trajectory of oil prices to get even steeper, and the price per barrel of oil doubled and eventually quadrupled.

“Rising oil costs imposed sky-high costs on consumers, who were forced to confront long lines at gas stations and rationing measures like ‘odd-even’ purchases by license place number,” the publication reported.

Economists believe that the United States economy is showing some of the same signs now that it did then. The Russian invasion of Ukraine could be making the problem even worse, particularly considering the worst inflation rates in 40 years breathing down our collective necks.

“I believe the Fed has not internalized the magnitude of its errors over the past year, is operating with an inappropriate and dangerous framework, and needs to take far stronger action to support price stability than appears likely,” Former Treasury Secretary Larry Summers wrote. “The Fed’s current policy trajectory is likely to lead to stagflation, with average unemployment and inflation both averaging over 5 percent over the next few years — and ultimately to a major recession.”

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