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Energy Crisis Threatens Return Of 1970s Inflation

By News Creatives Authors , in Business , at October 19, 2021

The growing energy crisis is causing rising prices for groceries, cars, rent, and just about everything else. Americans have been here before — in the 1970s when oil shocks and soaring inflation defined the economy.

Is America on a similar course today? It can’t be ruled out. 

While there are critical differences between the U.S. economy then and now, the inflation numbers speak for themselves, and Fed officials are no longer blindly assuming that rising prices are “transitory” and will reverse once Covid-related supply chain issues are fixed. 

U.S. consumer prices increased solidly again in September, putting pressure on the Biden administration to urgently resolve strained supply chains, hampering economic growth. 

In the 12 months through September, the Consumer Price Index (CPI) increased 5.4% after advancing 5.3% on a year-on-year basis in August. And that rate will move higher in the coming months as the recent energy price spike is factored in. 

Overall, inflation averaged 7.1% during the 1970s, although it hit double-digit levels in 1974 and 1979. 

We’re not at that point yet, but there are reasons to be concerned. Commodity prices are soaring, money supply growth is exploding, and government spending is surging. This is a dangerous cocktail that precipitates fears of a return to 1970s-style inflation.

The energy shocks of the 1970s, prompted by the 1973 Arab oil embargo and the 1979 Iranian revolution, factored heavily in the inflationary forces of that decade. This period was also marked by ramped-up government spending on social programs and the war in Vietnam. Increased government spending fueled high consumer demand. There were no offsetting tax hikes or spending cuts in other programs to offset the spending. Consequently, demand exceeded supply in the economy for several years, and inflation moved up.

Sound familiar? 

Today, oil prices are trading over $80 a barrel even though oil demand has not returned to pre-pandemic levels yet. Many experts think it is only a matter of time before they reach $100. 

Meanwhile, natural gas prices in Europe and Asia have spiked to record levels of the oil equivalent of around $200 a barrel due to commodity shortages ahead of the peak winter season. 

The high prices have caused some industrial facilities and power generators to close their doors because they can’t afford to keep running. Rationing has already begun in parts of Asia, which could thwart economic recoveries. And China recently called on its domestic industry — run mainly by state-controlled companies — to buy energy “at any cost” to prevent outages, stoking further panic buying.

The U.S. has been somewhat insulated from the energy crisis because America remains one of the world’s largest oil and gas producers. But at the end of the day, energy commodities are global, and the U.S. economy will increasingly feel the effects of the crunch. 

The average retail gasoline prices in the U.S. are now around $3.30 a gallon. Gasoline

and diesel prices are both well above $4 in some key markets like California. The $4 a gallon mark has typically been a red line, after which consumers start limiting their consumption. 

High fuel prices are also pushing up costs for deliveries of all goods, which threatens to stoke inflation further. 

Household expenditures for all major home heating fuels will soar this winter, putting a huge, unexpected burden on consumers. 

Compared with last winter, the U.S. Energy Information Administration forecasts propane expenditures will rise by 54%, heating oil by 43%, natural gas by 30%, and electricity by 6%. That means Americans will have less disposable income to spend on other goods and services.

The danger is that higher energy prices trigger demand destruction and cap economic growth. If that happens, there could be a scenario where 1970s style “stagflation” — inflation at higher-than-normal rates despite minimum growth — could make a return.  

It’s hard to project what a post-stimulus economy looks like. There has been $10 trillion in global stimulus in response to Covid, with about half that occurring here in the U.S.

Stimulus checks are nearing an end, but the Biden administration is about to initiate massive new spending programs with a $1.2 trillion infrastructure package and  Democrats’ safety net bill — cloaked as a budget reconciliation — that might still hit $2 trillion. 

These spending packages will put more upward pressure on consumer prices at a time when Covid stimulus programs are winding down. That means Americans will have less income to deal with higher prices for goods and services. 

OPEC is entirely in charge of this oil market, while Russia, the most critical gas supplier to Europe, has enormous sway over the gas crisis. Neither have a motive to relieve the energy crunch, not with fossil fuels under attack by Brussels and Washington in the run-up to the COP26 climate summit in Glasgow later this month. 

No, instead, the Saudis and Russians would like to remind the world of the continued importance of their oil and gas exports, which they hope will prompt some nations to pump the brakes on an overly aggressive, disorderly energy transition. 

So, American consumers should not expect a break on energy costs and associated prices for delivered goods and services anytime soon — certainly not with the Biden administration keeping the shackles on the domestic oil and gas industry

Sure, the American economy is different today than in the 1970s. Labor unions are less powerful now, and employment costs are lower. There is less U.S. manufacturing and far more globalization in the system. 

But there are enough similarities on the macro level to be concerned about a return of 1970s-style inflation. And when the dust settles, it’s safe to say that inflation is not going back to zero to 2 percent where it was for the last decade.


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