Commentary: The policy mistakes of the inflation crisis of the 1970s reverberate today

Moreover, inflation expectations in, say, 1970 were certainly not for the inflation that occurred afterwards. Politicians then tended to blame inflation on temporary factors, as we have seen more recently.

Economies are, it is true, more flexible today than in the 1970s. But the rise of protectionism may lead to a reversal in this regard. Energy intensity has also certainly decreased since then. But energy prices remain high. Finally, fiscal policy should be less expansionary this time around, although it has been a lot in 2020 and 2021.

Overall, the assumption that things will be very different this time around is plausible but far from certain.

POLICY MAKERS CAN’T KEEP INFLATION OUT OF CONTROL

Above all, whether this turns out to be true depends on what policy makers do. They must avoid the mistake of letting inflation spiral out of control, as they did in the 1970s. They must still have time to do so. But acting decisively also creates dangers, the most obvious being an unnecessarily sharp downturn, with ensuing economic costs.

On the other hand, it is possible that demographic shifts, slowing technological change, de-globalization, the exhaustion of significant past opportunities for growth and the rise of populism could weaken the long-term disinflationary forces. This would make it even more difficult to achieve and maintain low inflation.

A clear danger arises in the one area where the global economy looks more fragile than it did 40 years ago: the size of the debt stock, especially the stock denominated in foreign currencies. Basically, this is not only true for emerging and developing countries. The euro, too, is in essence a foreign currency for a member of the euro zone affected by the crisis.

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