Are the United States and other advanced economies experiencing stagflation, the unfortunate combination of high inflation and low growth in output and employment that characterized the mid-1970s? At least in America’s case, the answer is no. What the US is facing now is moderate inflation, without the stagnation part. That recalls the 1960s, not the decade that followed.

True, US headline consumer price inflation rose to an unexpected 6.2% in the year to October, the highest rate since 1991. Few still forecast an early return to 2% inflation, the US Federal Reserve’s long-run target. Inflation is also running at ten-year highs in the United Kingdom (4.2%) and the European Union (4.4%), though it remains low in Japan.

In contrast to the stagflationary 1970s, however, the US recovery since the pandemic-induced recession of 2020 has been strong, judged by GDP and labor-market indicators. Rising demand for goods is confronting supply constraints, including port bottlenecks and chip shortages, resulting in price inflation. Meanwhile, rising demand for labor is encountering a supply of labor limited by the lingering effects of the pandemic. This has resulted in wage inflation.

The US unemployment rate fell from 14.8% in April 2020 to 4.6% in October 2021, which would have been considered close to full employment during most of the last half-century. By contrast, unemployment reached 9% in stagflationary May 1975. Other current indicators point to an even tighter labor market today: the ratio of job vacancies to unemployed workers is the highest on record, as is the quit rate. Wage growth is also up, especially at the lower end of the wage distribution.

Only labor-force participation remains substantially depressed. Some of the decline reflects retirements, but much of it is attributable to COVID-19.

The evidence suggests that the US economy’s problem is not insufficient demand, which monetary and fiscal expansion could address, but rather inadequate supply, which they cannot. In particular, both nominal GDP and direct measures of domestic demand, like real personal spending or retail sales, have resumed their long-term pre-pandemic trends. When demand exceeds supply, a trade deficit and inflation result. We are currently witnessing both.

These are, in a sense, good problems to have. It is clearly better if both demand and supply are recovering, albeit with demand rebounding more quickly, than for neither to be doing so. The US economy is far ahead of where most thought it would be a year ago. It is also ahead of other countries, such as the Brexit-impacted UK, insofar as GDP is now above its pre-pandemic level.

Monetary policy can do nothing to ease capacity constraints. But these constraints could disappear on their own over the next year, as ports unclog, supply chains re-form, choosier workers successfully match with jobs they want, and supply responds to the high prices of those particular sectors facing acute excess demand.

Rather than resembling the 1970s, therefore, today is perhaps more like the late 1960s, another time of rapid growth and tight labor markets. Consumer inflation reached 5.5% in 1969.

Some worry that today’s moderate inflation will eventually be built into expectations, trigger a wage-price spiral, and come to resemble the high and persistent inflation of the 1970s. This is not impossible, and we should not be complacent about inflation. But it is unlikely that policymakers will repeat mistakes made back then.

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