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STAGFLATION IN U.S.
INTRODUCTION
An article from “The New York Times” published on Febuary 13
th
, 2011 mentioned that:
“In the USA, CONGRESS has made a terrible mistake. Amid a rhetorical debate centered on
words like “crisis,” “emergency” and “catastrophe,” it acted too fast. While arguments were made
about the stimulus bill’s specific components — taxpayer money for condoms, new green cars and
golf carts for federal bureaucrats, another round of rebate checks — its more dangerous
consequences were overlooked. And now the package threatens a return to the kind of stagflation
last seen in the 1970s.
From a global perspective, the picture only looks worse. As we have debated how much money to
borrow and spend in hopes of jump-starting our economy, we’ve ignored the worldwide stimulus
binge. China, Europe and Japan are all spending hundreds of billions of dollars they don’t have in
hopes of speeding up their economies, too. That means the very countries we have relied on to buy
our bonds, notably China and Japan, are now putting their own bonds on the global credit markets.
It seems that no one in Washington is discussing what happens when the world begins this
gargantuan borrowing spree. How high will interest rates rise? And more fundamentally, who will
have the money to buy our bonds? It is possible that the Federal Reserve will succumb to pressure
to “monetize” our debt — that is, print new money to buy our bonds. In fact, the Fed is already
suggesting that it will buy long-term Treasury securities in order to lower borrowing costs. If it
does, then our money supply, which has already increased substantially over the past year, will
grow even faster.
To American families, inflation is a destroyer of savings, a killer of wealth, a crusher of
confidence. It calls into question the value of our money. And while we all share in the pain, the
people whom inflation hits hardest are elderly people who live on fixed incomes, those in the
middle class who are struggling to save for retirement and college and lower-income people who
live paycheck to paycheck.
Combine high inflation and high unemployment and you have stagflation. Hindsight shows how
the pain of the late 1970s and early 1980s could have been avoided, yet we’re now again planning
to borrow and spend — and raise taxes — as President Jimmy Carter did. Soon we may again find

ourselves watching a rising “misery index” of inflation and unemployment together. If that
happens, individual earning power will evaporate, and our standard of living will decline….”
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STAGFLATION IN U.S.
Obviously, we are entering an era of high inflation, to judge by the massive growth of the money
supply in the United States, Europe and Asia, and the stubbornness of central bankers who insist
that high unemployment demands the creation of even more money. The last time the world went
through a similar period was the 1970s. The term that defined the era was "stagflation."
Thus because the 1970s stagflation did do great harm to the U.S. economy and global economy as
a whole, followed by a period of recesssion and there are evidences that we are on our way to the
replay of stagflation nowadays, a thorough understanding of stagflation is crucially important for
individuals as well as policy-makers to make reasonable decisions.
The urgency of this trend has led us to choose “Stagflation in the U.S.” as the topic of our
assignment. In this study, we will give a clear definiton of stagflation. Besides, a deep analyse is
made on the factual situation of the 1970s Great Stagflation and more recently, especially the main
causes that leads to stagflation in the period. Lastly, we will come up with some recommendations
for individual decisions and implementation of government’s policies.
We hope that through the arguments and data in our paper, you could gain comprehensive
understanding, including basic and in-depth knowledge, about the issue and be more confident,
more active when making decisions in today economic situation.
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STAGFLATION IN U.S.
CONTENTS
I. Definition
II. Facts
1. Facts of stagflation in the 1970s
2. Fears of stagflation return
III. Causes
1. General causes
2. Causes of stagflation in the 1970s

3. Explanation for risks of stagflation return
IV. Recommendations
1. Increasing aggregate supply
2. Long-term stock pick
3. Commodity investment
4. International system of buffer stocks
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STAGFLATION IN U.S.
I. DEFINITION
The generally agreed-upon stagflation definition is a state of the economy that exhibits elevated
unemployment rates and inflation at the same time. Typically, stagflation presents serious
problems for monetary policymakers, since the remedies for high unemployment are nearly
directly opposed to the remedies available for inflationary cycles. Most economists believe
stagflation can be attributed to either failed economic policies or to destructive or catastrophic
events that seriously affect the production capability of the overall economy. During the 1970s, for
instance, the United States experienced a prolonged period of stagflation due primarily to shortages
of raw materials. Livestock feed manufacturing was significantly impacted by the loss of the
Peruvian anchovy fishery in 1972, but the most significant economic factor was likely the oil crisis
of 1973, when OPEC severely limited the international oil supply in order to control prices and
boost profits for their members.
Regardless of its origins, stagflation is likely to cause significant and prolonged economic
problems that cannot be easily resolved. High unemployment reduces the overall buying power of
consumers and companies, and increasing prices lessen that buying power even more. This can put
a financial squeeze on both the consumer and the corporate sector and cause still more
unemployment as companies try to compensate for lower profits, increasing expenses and the
resulting reduction in financial liquidity.
II. FACTS
1. STAGFLATION IN THE 1970s
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People often refer to the 1970s stagflation as ‘the bad old days’. When
they think of the U.S. economy in that time the following comes to mind
first:
o Recession
o Inflation
o Unemployment
o High oil prices
In the following parts, we will look more closely into some economic indicators, including
Economic Growth Rate, Inflation Rate and Unemployment Rate, in order to identify Stagflation in
this period of US history.
a. Historical Economic Growth
The 1970s were perhaps the worst decade of most industrialized countries', including the U.S.’s
economic performance since the Great Depression. Although there was no severe economic
depression as witnessed in the 1930s, economic growth rates were considerably lower than postwar
decades between 1945 and 1973. U.S. manufacturing industries began to decline as a result, with
the US running its last trade surplus (as of 2009) in 1975.
In this paper, Economic growth is measured by Gross Domestic Product (GDP) in current dollars
(i.e. Nominal GDP) and in year 2005 dollars (i.e. Real GDP). As can be seen from the table and
graph, in the 1970s and 1980s, US economy experienced several periods of contraction: 1974 GDP
contracted 0.55%, 1975: 0.21%, 1980: 0.28% and 1982: 1.94%. For the other years, real growth
rate remained relatively small (less than 6%), with an exception of 1984 with a rate of 7.19%,
indicating a period of slow growth and economic contraction.
Annual Current-Dollar and "Real" Gross Domestic Product
1960-2000
Year
GDP
GDP in
billions of
current
dollars

GDP in
billions of
chained 2005
dollars
Real
Growth
rate
%
Year
GDP
GDP in
billions of
current
dollars
GDP in
billions of
chained 2005
dollars
Real
Growth
rate
%
1960 526.4 2,828.5 1975 1,637.7 4,875.4 -0.21%
1961 544.8 2,894.4 2.33% 1976 1,824.6 5,136.9 5.36%
1962 585.7 3,069.8 6.06% 1977 2,030.1 5,373.1 4.60%
1963 617.8 3,204.0 4.37% 1978 2,293.8 5,672.8 5.58%
1964 663.6 3,389.4 5.79% 1979 2,562.2 5,850.1 3.13%
1965 719.1 3,607.0 6.42% 1980 2,788.1 5,834.0 -0.28%
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1966 787.7 3,842.1 6.52% 1981 3,126.8 5,982.1 2.54%
1967 832.4 3,939.2 2.53% 1982 3,253.2 5,865.9 -1.94%
1968 909.8 4,129.9 4.84% 1983 3,534.6 6,130.9 4.52%
1969 984.4 4,258.2 3.11% 1984 3,930.9 6,571.5 7.19%
1970 1,038.3 4,266.3 0.19% 1985 4,217.5 6,843.4 4.14%
1971 1,126.8 4,409.5 3.36% 1986 4,460.1 7,080.5 3.46%
1972 1,237.9 4,643.8 5.31% 1987 4,736.4 7,307.0 3.20%
1973 1,382.3 4,912.8 5.79% 1988 5,100.4 7,607.4 4.11%
1974 1,499.5 4,885.7 -0.55% 1989 5,482.1 7,879.2 3.57%
1990 5,800.5 8,027.1 1.88%
Table 1: U.S. Annual Current-Dollar and "Real" Gross Domestic Product (1960-2000)
Source: />Figure 1: U.S. Annual Current-Dollar and "Real" Gross Domestic Product (1960-2000)
b. Historical Inflation Rates
Table 2 shows Inflation Rate data for the USA during the time 1959-2000, including monthly and
annual rates. Year over Year compares the growth rate of the Consumer Price Index (CPI-U) from
one period to the same period a year earlier.
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The oil shocks of 1973 and 1979 added to the existing ailments and conjured high inflation
throughout much of the world for the rest of the decade. Before the year 1970, annual inflation
rates mainly stayed below 3%. However, at the start of the new decade, the figure had more than
doubled itself 10 years earlier, then slowing down at around 4% in the following 2 years. In 1974,
there was a sharp rise in US inflation rate when it reached its highest of 11.04% in the last 15-year
period. The buying power of money decreased remarkably and consumers were not willing to buy
anymore. From 1975 to 1978, the rate went between relatively high levels of 7.6% and 9.1%,
before reaching a double-digit figure again in 1979, breaking the 1974 record and soar to a new
peak of 13.5% in 1980. In late 1980s, the situation became stable with the rate being kept under
5%.
Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
1965 0.9709% 0.9709% 1.2945% 1.6181% 1.6181% 1.9355% 1.6077% 1.9355% 1.6077% 1.9293% 1.6026% 1.9231% 1.6129%

1966 1.9231% 2.5641% 2.5559% 2.8662% 2.8662% 2.5316% 2.8481% 3.4810% 3.4810% 3.7855% 3.7855% 3.4591% 2.8571%
1967 3.4591% 2.8125% 2.8037% 2.4768% 2.7864% 2.7778% 2.7692% 2.4465% 2.7523% 2.4316% 2.7356% 3.0395% 3.0864%
1968 3.6474% 3.9514% 3.9394% 3.9275% 3.9157% 4.2042% 4.4910% 4.4776% 4.4643% 4.7478% 4.7337% 4.7198% 4.1916%
1969 4.3988% 4.6784% 5.2478% 5.5233% 5.5072% 5.4755% 5.4441% 5.7143% 5.6980% 5.6657% 5.9322% 6.1972% 5.4598%
1970 6.1798% 6.1453% 5.8172% 6.0606% 6.0440% 6.0109% 5.9783% 5.4054% 5.6604% 5.6300% 5.6000% 5.5703% 5.7221%
1971 5.2910% 5.0000% 4.7120% 4.1558% 4.4041% 4.6392% 4.3590% 4.6154% 4.0816% 3.8071% 3.2828% 3.2663% 4.3814%
1972 3.2663% 3.5088% 3.5000% 3.4913% 3.2258% 2.7094% 2.9484% 2.9412% 3.1863% 3.4230% 3.6675% 3.4063% 3.2099%
1973 3.6496% 3.8741% 4.5894% 5.0602% 5.5288% 5.9952% 5.7279% 7.3810% 7.3634% 7.8014% 8.2547% 8.7059% 6.2201%
1974 9.3897% 10.0233% 10.3926% 10.0917% 10.7062% 10.8597% 11.5124% 10.8647% 11.9469% 12.0614% 12.2004% 12.3377% 11.0360%
1975 11.8026% 11.2288% 10.2510% 10.2083% 9.4650% 9.3878% 9.7166% 8.6000% 7.9051% 7.4364% 7.3786% 6.9364% 9.1278%
1976 6.7179% 6.2857% 6.0721% 6.0491% 6.2030% 5.9701% 5.3506% 5.7090% 5.4945% 5.4645% 4.8825% 4.8649% 5.7621%
1977 5.2158% 5.9140% 6.4401% 6.9519% 6.7257% 6.8662% 6.8301% 6.6202% 6.5972% 6.3903% 6.7241% 6.7010% 6.5026%
1978 6.8376% 6.4298% 6.5546% 6.5000% 6.9652% 7.4135% 7.7049% 7.8431% 8.3062% 8.9286% 8.8853% 9.0177% 7.5908%
1979 9.2800% 9.8569% 10.0946% 10.4851% 10.8527% 10.8896% 11.2633% 11.8182% 12.1805% 12.0715% 12.6113% 13.2939% 11.3497%
1980 13.9092% 14.1823% 14.7564% 14.7309% 14.4056% 14.3845% 13.1327% 12.8726% 12.6005% 12.7660% 12.6482% 12.5163% 13.4986%
1981 11.8252% 11.4068% 10.4869% 10.0000% 9.7800% 9.5526% 10.7618% 10.8043% 10.9524% 10.1415% 9.5906% 8.9224% 10.3155%
1982 8.3908% 7.6223% 6.7797% 6.5095% 6.6815% 7.0640% 6.4410% 5.8505% 5.0429% 5.1392% 4.5891% 3.8298% 6.1606%
1983 3.7116% 3.4884% 3.5979% 3.8988% 3.5491% 2.5773% 2.4615% 2.5589% 2.8601% 2.8513% 3.2653% 3.7910% 3.2124%
1984 4.1922% 4.5965% 4.8008% 4.5639% 4.2339% 4.2211% 4.2042% 4.2914% 4.2701% 4.2574% 4.0514% 3.9487% 4.3173%
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1985 3.5329% 3.5156% 3.7037% 3.6857% 3.7718% 3.7608% 3.5543% 3.3493% 3.1429% 3.2289% 3.5138% 3.7987% 3.5611%
Table 2: U.S. Annual and Monthly Inflation Rates (1965-1985)
Source: />Figure 2: U.S. Annual Inflation Rate (1959-2000 Year-over-Year)
c. Unemployment Rate
Here's a look at the U.S. unemployment rate for people aging 16 and over for selected years from
1960 to 2000.
Throughout the 1970s and 1980s, unemployment rate was quite high in comparison with the
percentage of 3.5% of 1969, which created a significant social burden for the economy. This might
be the result of production contraction or reflected a level of minimum wage lower than expected.

The rate fluctuated continuously during the period, creating ups and downs, however, was above
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STAGFLATION IN U.S.
5% for most of the time. It kept hitting new records: 8.5% in 1975, 9.7% in 1982 and 9.6% in
1983.
Unemployment Rate (%)
1960-2000
Year Rate Year Rate Year Rate
1960 5.5 1972 5.6 1984 7.5
1961 6.7 1973 4.9 1985 7.2
1962 5.6 1974 5.6 1986 7.0
1963 5.6 1975 8.5 1987 6.2
1964 5.2 1976 7.7 1988 5.5
1965 4.5 1977 7.1 1989 5.3
1966 3.8 1978 6.1 1990 5.6
1967 3.8 1979 5.9 1991 6.9
1968 3.6 1980 7.2 1992 7.5
1969 3.5 1981 7.6 1993 6.9
1970 5.0 1982 9.7 1994 6.1
1971 6.0 1983 9.6 1995 5.6
Table 3: U.S. Unemployment Rate (1960-1995)
Source: />[Type text] Page 9