Inflation in the US has risen to the highest level since the 1980s and wages are rising, too. Similarities in conditions between now and the late 1960s, of rising inflation and wages, are fuelling fears of entrenched high inflation.
In the late 1960s, the policy responses of the Federal Reserve (FRB) led to a protracted period of economic overheating. Inflation and rising wages altered people's inflationary expectations, leading to the subsequent acceleration of inflation from the 1970s onwards.
The post-Covid wage increase was in part caused by a short-term economic boom, which may come down as economic growth slows. This time, the Fed has been quick to act to tighten monetary policy and, thus, inflation expectations have stabilised; we are not likely to see a repeat of the high inflation of the 1970s this time.
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Written by Naoki Murakami, Senior Economist, Asset Management One Co., Ltd.
20 May 2022