The Coming Demand Surge Brings Back Memories of 1970s Inflation

The last bout of inflation the U.S. experienced was in the 1970s. Commentators duly note this historic reference but don’t really understand it—many weren’t yet born, and few were adults, at the time. It was no mere inconvenience; it was a catastrophe.

During the first quarter of 1973, consumer food prices shot up at an annual rate of nearly 30% and the wholesale price index for farm products rose at an annual rate of 52%. Red-meat prices surged at an annual rate of 90% during the first quarter. Home heating oil prices nearly doubled in that quarter alone, and soybean prices rose to record highs.

The Journal reported recently that “commodity markets are roaring” and noted dramatic increases in prices of crude oil, copper and nickel as examples of what some predict to be “a supercycle . . . when prices of livestock, grains, metals, oil and gas all climb for years, even decades.”

That article that could have been written in the spring of 1973, when demand also exploded, putting such severe pressure on supplies that within a matter of months, prices of virtually all commodities—foodstuffs, minerals and petroleum—would soar. By the summer, the rate of inflation had shot up to 11%. It would continue at near double-digit annual rates until 1980, when the Federal Reserve, led by Paul Volcker, raised interest rates to nearly 20%. That crushed inflation but ushered in a harsh recession.

There are eerie parallels today. In 1973, the U.S. was coming off a two-year experiment in wage and price controls, which artificially depressed prices and muted signals that the economy was overheating. Then, too, the Fed pursued an easy-money policy, keeping interest rates low—though considerably higher than now, and without today’s purchases of bonds and mortgage securities.