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The Stagflation of 1970s

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The paper looks at the 1970s stagflation. It looks at efforts made by the Fed and the government towards making the situation to revert to normalcy.


The term stagflation was introduced in the 1970’s when the economy simultaneously experienced stagnation of real output growth and an acceleration of inflation. It was associated to the petrodollars and increasing profits of the domestic oil producers. The oil crisis brought in a lot more dollars than was paid for the imports of the expensive oil. These extra dollars were not used in investments and not absorbed in a growing economy. This was indeed strongly inflationary. The sharp contractions in the global production of crude oil, led to a contraction in real GDP. This was a supply shock which led the price of oil to rise sharply, and the rate of increase in general price indices, such as the Consumer Price Index (CPI) accelerated (Kasriel, 2008).

Reaction by the Fed

The Phillips curve phenomenon suggested that high unemployment was associated with low inflation and vice versa. The stagflation in 1970’s was a new phenomenon, and the fed chairman very sharply increased interest rates in what was called a ‘disinflationary scenario’. It was after the US prime interest rates had soared into the double digits that inflation did come down. The fed was hence credited for at least stopping the inflationary situation in the stagflation (U.S. Department of State, 2010).

Reaction by the Government

According to Stanley St. Lab (2010), the demand was more than the supply which increased prices of goods. Workers demanded higher wages that pushed prices further up. The government on the other hand pegged payments for social security to CPI which helped to combat inflation. The president, Jimmy Carter increased government spending and constituted voluntary wage and price guidelines, with an objective to control inflation which did not work out. This reaction was unsuccessful, since inflation rates continued to increase and unemployment reached embarrassing levels of 10.8 %. When fed curtailed the inflation rate by refusing to supply the money needed by the inflation desolated economy, the country went to a period of recession.


Kasriel, P.L. (2008). US Heading for 1970’s Style Stagflation? Retrieved 29 April 2010 from <http://www.marketoracle.co.uk/Article3792.html>

Stanley St. Labs. (2010). Stagflation in 1970s. Retrieved 29 April 2010 from <http://www.economywatch.com/inflation/stagflation/1970s.html>

U.S. Department of State. (2010). Stagflation in the 1970s. Retrieved 29 April 2010 from <http://economics.about.com/od/useconomichistory/a/stagflation.htm>

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