From stagflation to the ‘misery index,’ some economists fear a 1970s redux

Cars lined up near gas stations was a familiar sight in 1973.Marty Lederhandler/Associated Press

WASHINGTON — During the 1976 presidential campaign, Democratic nominee Jimmy Carter capitalized on the economic pain voters were feeling under Republican President Gerald Ford by seizing on an obscure metric with a dreary name: the misery index.

And misery was in plentiful supply in the 1970s — unlike gasoline. An oil embargo by Arab nations sent gas prices skyrocketing, causing shortages and long lines at the pump. Soaring gas prices fueled high inflation at a time when the economy was stagnant, creating a troubling and counterintuitive new phenomenon called stagflation.

The misery index was a rough way to measure the nation’s slide into stagflation and adds together two major indicators that speak to the country’s economic strength: the monthly consumer price index and the unemployment rate. At the time, Carter noted the 16 percent figure under Ford was the highest average for any president in more than 50 years. It was a potent political attack that helped propel him to victory. But in 1980, Republican Ronald Reagan turned the same metric against Carter and stagflation felled another president.

Now, the misery index is rising again amid warnings of another bout with stagflation, raising the prospect that the economy could be turning into “That ‘70s Show” — a disheartening rerun that would deliver another blow to pandemic-battered Americans and spell deep political trouble for President Biden and the Democrats.

Former Federal Reserve chairman Ben Bernanke said he sees stagflation ahead as the central bank aggressively hikes its benchmark interest rate to try to tamp down inflation by slowing economic growth. Prominent economist Mohamed El-Erian recently declared stagflation is “unavoidable.” And more than three-quarters of investment fund managers — 77 percent — expect stagflation to hit the US economy in the next year, the highest level since 2008, according to a survey last month by Bank of America Global Research.

“Certainly the economic outlook globally is challenging, and uncertain, and higher food and energy prices are having stagflationary effects,” Treasury Secretary Janet Yellen said during an economic summit in Europe last month.

The term stagflation is a mashup of stagnant economic growth and high inflation — two painful economic conditions that, when combined, make life especially difficult for average Americans. Until the 1970s, economists had thought it was impossible for both to happen at the same time because slow growth pushes prices down, not up — one of the only pluses of a bad economy. But they discovered that a major economic shock, such as the Arab oil embargo, could upend that relationship.

The pandemic and the Ukraine war have produced similar jolts that might already have pushed the United States into stagflation, said Princeton economist Alan Blinder, a former Fed vice chair.

“Food prices are rising a lot. Energy prices are rising a lot. That’s the classic supply shock in stagflation,” said Blinder, who has studied what’s known as “the Great Stagflation” of the 1970s. “Growth is slowing to the point that we could be in it right now.”

The economy has cooled significantly from last year’s roaring 5.7 percent growth, which was the strongest since 1984. The economy actually shrank at a 1.5 percent annual rate in the first three months of this year, although the contraction appears to have been caused by statistical oddities. Forecasters believe the economy continues to grow, but say that 2022′s pace will only be about 3 percent. They warn there’s a high risk of a recession — defined as two consecutive quarters of contraction — hitting in the next two years.

If stagflation were to settle in and drag on, as it did in the 1970s into the 1980s, it could be worse than a short, mild recession. But economists predicted stagflation would be more fleeting this time. The economy is stronger than it was back then, inflation isn’t nearly as entrenched, and the Fed, which bungled its response in the 1970s, is committed to doing what’s necessary now to reduce price growth.

“Most people are not talking about an elevated probability that we’re going to see the terrible economic conditions that we saw in the late ‘70s and early ‘80s,” said Karen Dynan, a Harvard professor and former Treasury Department chief economist during the Obama administration. “We wouldn’t have had to have the terrible recessions we had in the early 1980s if [the Fed] had gotten on inflation sooner.”

Fed officials have been criticized for not responding quickly to this round of high inflation as prices began rising last year. But after initially saying he expected elevated inflation to be temporary, Fed Chair Jerome Powell has pledged in recent months to attack it by aggressively increasing the central bank’s short-term interest rate, even if slowing growth pushes up unemployment, which in April was at a historically low rate of 3.6 percent.

“We need to see inflation coming down in a convincing way,” Powell said at a Wall Street Journal forum last month. “And until we see that, we’re going to keep going.”

Powell has repeatedly predicted that the Fed can bring down inflation without triggering a recession. But stagflation, which can occur even without a full-blown recession, could be a different story.

The misery index is elevated because of high inflation and will rise higher if the unemployment rate goes up before the consumer price index moves down. And concerns about stagflation have been a factor in the recent stock market declines.

“The drumbeat is certainly getting louder and it’s more and more a discussion we’re having with clients in terms of how would you position yourself if this plays out,” said Frank Panayotou, managing director at UBS Private Wealth Management, an investment advisory firm in Boston.

“Our sense is this economy is on the way to slowing down, and the question is: is there a crash landing at the end of it or can we find some place to land this thing?” he said. “I think it’s going to be difficult, but we don’t think it will end up in a stagflation-type scenario.”

One difference between now and the 1970s is inflation has only been elevated for about a year and consumer confidence measures indicate Americans don’t think it will last for years. By contrast, high inflation had become entrenched by the late 1970s, creating a self-fulfilling prophecy known as a wage-price spiral: workers push for higher wages to keep up with the cost of living, which forces businesses to raise prices, sending inflation spinning ever-upward.

That crisis wasn’t brought under control until the early 1980s after then-Fed chair Paul Volcker pushed interest rates up to nearly 20 percent because his predecessors had failed to rein it in.

“It’s essential to understand the inflation of the 1970s amounted to a 15-year process of . . . inflation becoming more and more out of control and ineffective attempts to control it,” said David Wilcox, a senior economist at the Peterson Institute for International Economics and at Bloomberg Economics.

Recent promises by Powell and other Fed officials to fight inflation help people see a light at the end of the tunnel, said Dana Peterson, chief economist at the Conference Board, a private research group. She doesn’t think the country is experiencing stagflation right now, but said it could arrive next year if there are continued economic shocks from the Ukraine war and supply chain disruptions from pandemic shutdowns in China.

But Peterson said she expects stagflation would only last for about six months if it happens — unlike the long slog of the 1970s.

“A recession is bad. Stagflation can be just as awful if it’s protracted,” she said. “But a couple of quarters of numbers that are low [economic growth] and high inflation, that’s not the ‘70s.”