1970s Stagflation
1970s stagflation was the rare combination of high inflation and high unemployment, caused by twin oil shocks, accommodative monetary policy, and inflation expectations that came un-anchored.
| Peak CPI inflation | ~14.6% (Mar 1980) |
|---|---|
| Misery index peak | ~22 (1980) |
| Trigger | Oil shocks 1973 & 1979 |
For most of the postwar era, economists assumed inflation and unemployment moved in opposite directions. The 1970s shattered that assumption.
Two oil shocks (the 1973 OPEC embargo and the 1979 Iranian revolution) drove up costs across the economy. These were cost-push shocks: they raised prices and reduced output, so inflation and unemployment climbed together. CPI inflation peaked near 14.6% in March 1980, and the "misery index" (inflation plus unemployment) hit roughly 22.
What turned a one-off price shock into a decade of inflation was expectations. With the Federal Reserve running policy too loose and its commitment to price stability in doubt, credibility drained away and people came to expect high inflation, which made it self-fulfilling. The episode is the reason economists now put expectations at the center of the Phillips curve.
Sources: Federal Reserve History, "The Great Inflation"; see the methodology.