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Is There an Inflation Problem or Not?

Mike Slavin< Mike Slavin July 13, 2021

In the summer of 1974 when Richard ‘Tricky Dick’ Nixon decided to do the country a favor and resign, Gerald R. Ford took over as president. Ford inherited one of the worst economic crises in US history, a combination of unemployment at over 7%, negative GDP growth, and inflation at over 12%.   

A near-perfect storm of economic factors came together in the 1970s to crank up the rate of inflation to levels that stumped experts in both the public and private sectors – with the affable Gerry Ford as one of the storm’s victims. 

In clear, 20/20 hindsight, most economic experts have concluded that the biggest cause of the runaway inflation of the 1970s was flawed monetary policy (supported by political leaders) that financed massive budget deficits.  That cause-and-effect linkage was far from clear way back then.  With an election on the horizon in 1972, jobs and economic growth were the biggest issues.   

President Nixon had installed Arthur Burns as Fed chairman, and he publicly and privately encouraged Burns to lower interest rates and crank up the money supply.  Nixon was widely reported to have said that “we’ll take inflation if necessary, but we can’t take unemployment.” 

Mission accomplished.  With an additional assist from wage and price controls that put a short-term lid on inflation, the economy was humming along in 1972 as Nixon won 49 of 50 states. But the eventual wildfire of inflation had been lit

The Oil Crisis Intensifies Inflation 

The embers of runaway inflation were growing into flames in 1973 when the world was slapped with the Energy Crisis started by the Arab Oil Embargo. This caused crude oil prices to jump from around $3 per barrel to over $30 per barrel.  At the same time, bad weather conditions in the mid-1970s pushed the consumer price index for food to a 10-15% annual growth rate.   

Oh, and did I mention that the Gold Standard was removed in 1971, leading to wild fluctuations of the value of the dollar, exchange, and interest rates?  High unemployment.  Double-digit inflation.  Enter poor Gerry Ford.   

Soon after taking office, Ford addressed a joint session of Congress with a speech entitled “Whip Inflation Now.” In which, rather than going back to wage and price controls, he announced a series of proposals for public and private voluntary steps to bring inflation under control. Those included things like carpooling and turning down thermostats.  WIN, Whip Inflation Now.  The campaign was ineffective and widely ridiculed.  

To combat inflation, the Fed began raising interest rates in 1977, which cured the problem but led to the recession of the early 1980s.  And we all lived happily ever after.  Until COVID came along. 

By WIN sign, Public Domain, https://commons.wikimedia.org/w/index.php?curid=20770484

1970s Lessons We Can Apply Today  

What if any, are the lessons from the 1970s that can be applied to today’s environment of “is there an inflation problem or not?” 

  • Inflation is a form of economic cancer.  If it’s allowed to spread throughout the economic body as it did in the 1970s, we’ll all be in for some tough times. 
  • Changes in monetary policy can have wide-ranging and sometimes unanticipated effects.  Interest rates are currently at historic lows.  The jury is still out on where this is taking us. 
  • We may think we understand what’s going on, but we probably don’t.  The economic experts of the 1970s were sure they had things under control and wouldn’t repeat mistakes of the past. 
  • The worldwide economic engine is super complex.  While there were lots of industries that were losers in the 1970s, there were also quite a few winners.  The same thing is happening now.  Macroeconomic problems don’t necessarily lead to similar microeconomic effects. 

Where will prices be going over the next 12 months?  Inflation problem or no inflation problem?  What should pricing professionals do?   

The most important thing is to be prepared to act.  You can bet something unanticipated is going to come up that may require you to make a quick course correction in pricing policy, strategy, and/or tactics.  Agility will continue to be a key to economic survival.  Will your current price management systems be able to support the next wild economic roller coaster ride?   


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