America's inflation spike has led to worries about an outbreak of sustained high inflation. But the threat of a repeat of 1970s-style inflation seems remote
The Great Inflation, as the episode in the 1970s is often called, led to radical revisions in macroeconomic thinking. Until then Keynesian economists believed that a permanently lower rate of unemployment could be achieved by accepting higher inflation. Critics of this view, like Milton Friedman and Robert Lucas of the University of Chicago, thought differently. In the long run, they argued, the unemployment rate was determined by an economy’s structural features.
Start first with supply shocks. The current inflation spike is clearly rooted in disruptions relating to the messy process of reopening. Supply shocks featured prominently in the Great Inflation as well, which might suggest that a short-term problem can quickly become entrenched. But a closer examination of that episode provides some reassurance.
Some economists worry that today’s stimulus-powered growth could lead to a repeat of the errors of the past. Employment in America remains nearly 8m short of its pre-pandemic level, pointing to plenty of spare capacity. But even the Fed reckons that this might quickly be hoovered up, with unemployment falling below its long-run rate by the end of 2022.