It’s the ’70s, but not all over again

Is stagflation lurking?; This time rising wages and currencies in emerging markets will drive inflation

John Crow, a former governor of the Bank of Canada, remembers the stealth with which inflation wormed its way into the Canadian economy the last time that oil and food prices were soaring and the U.S. dollar was tumbling in the early 1970s — exactly as they are today.

Canada’s annual inflation rate rose from 1% in late 1970 to 5% in 1971. By 1974 it was at 12%.


“The bank was kind of shocked,” said Mr. Crow, who joined the bank’s research department in 1973 and finally vanquished the inflation beast when he was governor in the 1990s. “If you look at the numbers, they really moved up very quickly. There was a time at the beginning of the 1970s when the exchange rate shot up — and this is interesting from the point of view of today’s exchange rate — inflation was very low…. It wore off pretty quickly.”

Now, with oil hitting a new record above US$110, food costs soaring, and the United States hurtling toward recession, fears are growing North America could face a repeat of that nasty 1970s’ affliction: stagflation, an ugly mixture of both slow growth and high inflation.

However, it will not be North American wages that drive inflation higher. The new twist this time is that inflation could start to drift higher on the back of rising costs and currencies in emerging markets, which have long been a source of downward price pressure.

Financial Post