How Close Are We Really to 1970s-Style Inflation?

By Robert Burgess, Elaine He and Eliza Winger

June 11, 2022, 8:00 AM EDT

Photo illustration that combines a line that charts the change in CPI in the background with a stylized photo in the foreground of a sign that says, 'The Whittier, Inflation makes you realize you never had it so good so briefly.'

Inflation has come to dominate dinner table discussions as the price of food, energy, housing and almost everything else Americans deal with on a daily basis vault higher. In May, it climbed to its highest level since 1981, rising 8.6% from a year earlier as measured by the Consumer Price Index. There is concern now that we may see a repeat of the 1970s, when the inflation rate averaged 7.1% for a whole decade, devastating household finances and the economy.

This is a major shock to a whole generation of consumers who had become accustomed to little or no inflation. Bloomberg Economics estimates that US households will have to spend an extra $5,200 this year, or about $433 a month, for the same consumption basket.

The reasons for surging prices are well known: Supply-chain disruptions due to the Covid-19 pandemic led to shortages of goods, Russia’s invasion of Ukraine hit the supply of key commodities, while at the same time the government funneled trillions of dollars of aid directly to consumers and businesses. What’s not known is how long this painful bout of high inflation will last and what, if any, will be its lasting impact. A good place to start looking for answers is by understanding what is driving inflation and putting the current situation in context.

Consumer Price Index Components

We’re seeing the greatest inflation pressures in energy, transportation, food and housing — all the essentials.

West Texas Intermediate crude oil has more than doubled from around $40 a barrel back in 2020 to more than $120 a barrel. As a result, the price of a gallon of regular-grade gasoline has jumped from around $2.15 to almost $5, according to the Automobile Association of America.

The same goes for food. Anybody who has been to a grocery store can attest that prices for almost everything are higher, increasing at double-digit rates. Just last year it wasn’t unusual to see price declines for things like pasta, certain meats, fresh vegetables, flour and butter. No more.

Yet, if we consider the average person’s spending, the biggest price increases were for items that represented a smaller share of consumption.

Sources: US Bureau of Economic Analysis (PCE); US Bureau of Labor Statistics (CPI)
Note: Selected PCE items represent 75% of total spending.

Nonetheless, taken together, at least 16% of personal spending went to items that saw more than double-digit price growth in the past few months, including increases of 49% for motor fuel and 107% for fuel oil in May.

Cost of Goods

There is a silver lining, thanks to advances in productivity and technology, albeit one that isn’t readily seen by consumers. When we compare prices as a share of income, many goods are no more burdensome now on earnings — and even comprise a smaller chunk — than a generation ago. In other words, while many items are more expensive now compared with 1998, income during this period has risen faster.

Sources: US Bureau of Labor Statistics (average prices); US Bureau of Economic Analysis (income)
Note: BLS collects average price levels for hundreds of items starting January 1980. Chart selects all items with a May 2022 and January 1998 value (about a generation), and calculates items’ share of April 2022 (the latest available) and January 1998 nominal disposable income per capita. The result is a ratio of the current share to the earlier share.

When it comes to energy, the average price of household utilities like cooking gas and electricity are a smaller share of incomes. But in recent months, consumers are paying more than 1.5 times to fill up their gas tanks, and fuel oil is now more than double its share of income.

When it comes to protein, things like steaks, bacon and roasts are more expensive, but chicken, center-cut pork chops and some other cuts of beef are more affordable now than they used to be.

Many agricultural goods are less costly, like fresh tomatoes, strawberries and bananas. Orange juice and malt drinks are less pricey as a share of income, and wine is slightly more on average. And though a cup of joe at a specialty cafe can set you back, roast ground coffee is now a fraction of the cost.

Rice, which is known as the most important food in the world because it feeds half the global population — more people than any other crop — costs less as a share of income, along with other staples such as whole milk, pasta, flour and bread.

Energy and food consumption as a share of disposable income are also historically low. Data from the Bureau of Labor Statistics show gasoline and other fuels account for 2.9% of Americans’ spending, a little more than half of what it was during the late 1970s and early 1980s. During the 1960s, Americans were paying between 15% to 19% of their disposable income for food. Now it’s 7.6%.

Source: US Bureau of Economic Analysis

Average Expenditures by Income Level

Of course, none of this is a real problem for high earners. In fact, for about half of Americans — those netting $64,557 or more — even if their expenditures increased by 10%, they will unlikely go hungry or lose their homes. For the richest Americans, a 10% increase in overall expenditures would still leave them with more cash left over than what most people earn in a year.

But for the other half, even small price increases could tip them over into the red or dig them deeper into the hole. Knowing that some goods are cheaper historically is cold comfort.

Source: US Bureau of Labor Statistics
Note: 2020 data.

In dollar terms, lower earners spend much less on housing, transportation, food and health care compared with higher earners. But these essentials represent a higher percentage of expenditures. In other words, the lowest earners can’t cut back while the highest earners can afford not to cut back.

Wage Growth

Wages are also mixed. After years of little to no raises, the biggest gains on a percentage basis are going to the lowest-paid workers. Income inequality, however, remains a major problem: A 6% raise for the lowest fifth percentile of workers who earned an average of $27,026 in 2020 according to the Census Bureau is less than $2,000; a 3% raise for the top five percent earning an average of $273,739 translates to more than $8,000.

Change from a year earlier

Source: Federal Reserve Bank of Atlanta
Note: 12-month moving average of median hourly wage growth.

The downside is that wage gains are not keeping pace with inflation: While nominal personal disposable income is boosted by accelerating wages, real disposable incomes are declining. This means purchasing power is being eroded.

Disposable income

Source: US Bureau of Economic Analysis

Household Balance Sheets

At the aggregate level, Americans are in their best shape ever financially thanks to generous fiscal stimulus programs enacted by the government to support the economy, along with the Federal Reserve’s ultra-loose monetary policy that boosted financial assets such as stocks and housing prices.

US household wealth surged $38.6 trillion since the start of the pandemic to $149.3 trillion through the first quarter, according to the Fed. The 35% increase over nine quarters is almost equal to the previous six years combined. This is great for those who can afford to accumulate and save. Americans are also sitting on sizeable savings, which should help cushion the sticker shock of rapidly rising inflation. Checkable deposits for households and nonprofit organizations rose to $4.47 trillion in March from $1.30 trillion two year ago, according to the Fed.

Source: US Federal Reserve

As a share of disposable income, household net worth is at its highest level, having expanded by about 50% since the financial crisis back in 2008–09. One of the lessons Americans learned after the financial crisis was the perils of having too much debt. As a result, they’ve been paring back their obligations to where debt payments account for just 9% of disposable incomes, down from a record of more than 13% in 2007.

Share of disposable income

Source: US Federal Reserve

Outside of a few, brief exceptions, inflation has been virtually non-existent since the start of the 1990s. So much so that the Fed has been more worried about preventing deflation. It’s been a long time since consumers have had to deal with inflation at this level, and you can’t blame them for their alarm at the rapid rise in prices we are currently witnessing. The climb down toward the Fed’s 2% inflation target will remain stubbornly slow. Gasoline prices continue to soar along with robust services prices even as pockets of moderation in core goods prices have emerged.

Corrects to remove eggs from list of staples that costs less as a share of income.