It Won’t Be a Repeat of the 1970’s

With inflation (headline CPI) reaching 9.1% last year (now 3.2%), union labor agreements being negotiated, and most recently, the Yom Kippur War-inspired Hamas attack on Israel, there are enough parallels with the 1970’s to wonder if the future will bring high inflation and high interest rates. But the economic conditions which created that era are much different now and suggest a continuation of disinflation and lower rates. Below are seven contributing factors to 1970’s inflation that aren’t present now.

1. Dollar depreciation - The Bretton Woods agreement of 1944 which fixed global exchange rates to the dollar and the dollar to gold was slowly undone by the Nixon administration in the early 1970’s. This started a broad decline in the dollar. Over the decade, the dollar declined about 30% (U.S. Dollar Index.) Weaker currencies are inflationary. Conversely, over the last 10-years, the U.S. Dollar Index has appreciated about 30% (+28.9%, 10/2013 – 10/2023.)

bretton woods agreement

2. No Federal Reserve inflation target – In January 2012, the Federal reserve announced an explicit inflation target of 2%. A well-defined and defended inflation target helps to anchor inflation expectations. Inflation expectation metrics aren’t available from the 1970’s, but they are low now; around 2% to 3%. Having a target helps markets believe that the Fed will return inflation back to 2% and prevents a continued ratcheting higher of inflation like the 1970’s. A direction without a destination kept the public unsure of the Fed’s resolve to lower inflation back then.