Disappointing GDP growth and high inflation have many commentators talking about stagflation. Advanced estimates from the Bureau of Economic Analysis suggest real GDP fell for a second straight quarter in 2022. At the same time, the Consumer Price Index (CPI) reached a 40-year high in June. Falling energy prices left the headline CPI unchanged in July, though core inflation, which excludes volatile food and energy prices and is typically thought to be a more reliable predictor of future inflation, remained high at 5.9% year on year.

Are we experiencing a 1970s-style stagflation? By a measure of the raw inflation rate, the simple answer is ‘no’. Inflation had hit double digits on multiple, extended occasions during the 1970s. Currently, neither the CPI (9.1% in June) nor the GDP deflator (7.5% in Q2) has broken into double digits. The most important distinction between inflation in the 1970s and the present inflation, however, is the nature of the monetary regime. Today’s Federal Reserve has already begun taking aggressive action to bring down inflation and investors seem to believe it will succeed. During the 1970s, the Fed continually increased the quantity of money and did so at an increasing rate. Paul Volcker assumed leadership at the Federal Reserve in 1979. However, inflation expectations were not immediately tamed. Inflation would not fall below 5% until the last quarter of 1982. In the same quarter, unemployment peaked at 10.8%. The Volcker Fed adopted countercyclical interest rate targeting in an effort to stabilise inflation expectations which had been high and variable at the time.