Stagflation?
The classic example of embedded inflation is the wage-price spiral — better described as wage-price leapfrogging — of the 1970's. Back then, whenever wage contracts came up for renewal, workers demanded big raises, both to catch up with past inflation and to offset expected future inflation. And whenever companies changed their prices, they raised them by a lot, both to catch up with past wage increases and to offset expected future increases.
The result of this leapfrogging process was that inflation became a self-sustaining process, feeding on itself. And ending that self-sustaining process proved very difficult. The Fed eventually brought the inflation of the 1970's under control, but only by raising interest rates so high that in the early 1980's the U.S. economy suffered its worst slump since the Great Depression.
Fed officials now seem worried that we may be seeing the start of another round of self-sustaining inflation. But is that a realistic fear? Only if you think we can have a wage-price spiral without, you know, the wages part.
posted by walldon | 9:27 AM
3 Comments:
I've long thought nobody really understood what was unique about the late 70's: the incredible growth in the demand for jobs arising from a double-whammy: not only the baby boomers coming of age, but also women moving into the marketplace. The growth in the workforce between 1975 and 1980 was phenomenal. What was the government to do? It had to follow stimulative policies in order not to have unacceptable levels of unemployment, but that resulted in unacceptable levels of inflation. Right?
Also, I would quibble, not necessarily correctly, with one factual point of Krugman's. It may or may not be of any significance. In my recollection, workers were always struggling just to keep up with inflation that had occurred since the last raise or contract, and seldom were able to extract any anticipatory increases.
Re: Kissweb's comment on who was getting the anticipatory increases. My recollection agrees with yours. It was the price increases that were anticipatory, not the wage contract increases.
Still, of course, the probability of continuing price increases made it all the more important to bargain hard to at least pull up to where you had been three years before.
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