In the 1985 cult classic “Back to the Future,” actor Michael J. Fox plays a teenager who travels back in time and gets stuck in the past, trying desperately to return “back to the future.” For investors, the Bureau of Labor Statistics’ latest inflation report may raise feelings of déjà vu and concerns about economies, and subsequently markets, being stuck in their own time warp; a return to the inflationary 1970s. However, this isn’t the first time the world has been worried about a return to the 1970s. In fact, ever since the 1970s, almost any period of above-consensus inflation has been met with headlines that have alluded to the 1970s in some form or other, a trend perfectly encapsulated in The Economist cover from mid-2004 (see Figure 1). Suffice to say, the 1970s aren’t usually the first thing that comes to mind when we look back at the 2000s from today’s vantage point.
Figure 1: 1970s-fearing headlines are not a new phenomenon
Source: The Economist, June 19, 2004
Still, maybe 2021 is less different than before, as there are some apparent similarities? We’ve witnessed the end of a long war (Vietnam in the 1970s versus Afghanistan in 2021), we’re in a supply chain crisis (the 1970s was a decade known for shortages) and in the midst of a cold war (substitute the Soviet Union for China). Yet, despite these similarities, there are three main reasons why economies aren’t going back to the 1970s.
Three Key Reasons This Isn’t the 1970s for the Economy
First, organic demand growth in terms of new disposable income is not going back to the 1970s. In the United States, the share of new workers, as measured by the 15-34 year age group, peaked in 1980 alongside inflation. That age group is an important driver of growth and inflation because, on average, they make several critical first-time purchases, buying their first car, having their first child and buying their first house, often on credit. Separately, another source of new disposable income, female participation in the labor force, had its greatest gain in the 1970s. So, while demand is certainly exceptional today (as we described in our previous commentary, Halloween and Christmas for Markets, these 1970s-era drivers were one-time phenomena.