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In talking about the current inflationary economy, it’s easy to look at recent history for comparison. In 1979, the U.S. Federal Reserve tightened monetary policy to ease inflation that had been occurring since the late 1960s. In 1979, the inflation rate had jumped to 7.7% year over year, which is similar to the numbers we are facing today. It was the second time that decade the Fed had attempted to slow inflation by raising interest rates. The board eventually stopped its attempts to tighten the money supply in 1973 when unemployment rates rose.
But in 1981 and 1982, the then-Fed Chair, Paul Volcker took drastic steps to stem inflation, which had reached 11.6 percent, by raising interest rates as high as 19%. The policy helped stop inflation but also caused a recession.
Today, when economists observe “This is not 1980,” they mean that current U.S. Federal Reserve Chair Jerome Powell is more likely to take slow and steady steps to stem inflation.
“The Fed’s goal is not a recession,” Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management Co. told MarketWatch.
Unlike the 1980s, the cost of borrowing money remains low in 2022. Treasury yields also remain low. Banks use this benchmark 10-year Treasury rate to benchmark the price of long-term assets, such as corporate bonds and real estate debt, MarketWatch reports. Even if the Fed hikes interest rates, they won’t do it as dramatically as they did in 1981, nor as quickly.
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Other factors, not just Fed policy, also played into curbing inflation in the early ’80s. While prices of many items were going up, oil prices dipped dramatically. This reduced gas prices, which made the cost of transporting goods go down. Between 1980 and 1986, oil prices dropped by 75%.
At the same time, the Bureau of Labor Statistics changed its method of calculating shelter inflation, eliminating rising interest rates from the formula. Rent and mortgage prices play a substantial role in calculating the Consumer Price Index (CPI). So while inflation did slow down, it wasn’t exclusively due to tightening economic policy, according to MarketWatch.
In this regard, the economy right now does show at least one parallel to the ’80s. Specifically, as the economic side effects of the global pandemic continue to wane, supply chain bottlenecks and challenges could make transporting goods easier and less costly. This could reduce overall prices at grocery stores, restaurants and brick-and-mortar and online retailers. However, rising wages, including the increase in the minimum wage, could offset any positive effects of a smooth-running supply chain.
“Monetary policy is important, but so are factors outside the Fed’s control,” DataTrek Research co-founder Nicholas Colas said in a note, reported by MarketWatch. “Perhaps supply chain issues will fade this year the way oil prices did in the 1980s. If not, then the Fed will face some hard choices.”
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