Understanding the Possibility of a 1970s Inflation and Mortgage Rate Return

Recently, the Consumer Price Index (CPI) report was released, showing that over a 12-month period, inflation has risen to 3.2%. This is only slightly below the average inflation rate of 3.3% dating back to 1914. Financial markets are becoming increasingly concerned about the potential return of 1970s-level inflation, which could lead to double-digit mortgage rates. However, is this fear justified in today's economic landscape?

Examining 1970s Inflation Concerns

References to the 1970s are prevalent whenever inflation fears surface, mainly because that decade experienced deeply entrenched inflation, culminating in mortgage rates peaking at 18% in the early 1980s. Federal Reserve officials have raised interest rates promptly and are being cautious about any potential rate cuts due to these historical concerns. But are these 1970s scenarios likely to recur given the current state of the economy?

Looking at past data, the threat of deflation, a significant concern in the 1800s, has not been an issue in the post-World War II era. As long as employment is strong and the economy grows, deflation is unlikely. Nevertheless, the critical question remains whether the situation in the 1970s can play out again today. Several indicators, such as slowing core inflation and recovered stock markets, suggest that the economic conditions differ substantially from that challenging time.

The Latest Inflation Figures

The U.S. Bureau of Labor Statistics reported a 0.4% rise in CPI for February, adjusted seasonally, following a 0.3% increase in January. Even though core inflation data from various reports, including the CPI, Producer Price Index (PPI), and Personal Consumption Expenditures (PCE), have demonstrated a slowdown from COVID-19 peaks, the current core PCE rate, which the Fed closely monitors, stands at 2.8%. This figure is significantly lower than the double-digit rates seen in the 1970s.

With the stock market rebounding, a robust labor market, and the economy growing, the concerns that inflation could not cool off amid these conditions have been proven unfounded, as the current core inflation rate is approximately 3.76%.

It's also important to note that, historically, maintaining core PCE inflation above 2% in the 21st century has been a challenge. The global pandemic brought about supply shortages and a surge in demand for goods, which led to temporary inflation spikes. As supply chains recover, we typically see a period of disinflation following such inflationary bursts.

Potential for a 1970s Inflation Redux

To experience a similar inflation growth rate as the 1970s, our current economy would need to see specific conditions, such as rapid wage and labor force growth paired with housing shortages, which are not presently occurring. Current factors, like an increasing supply in multi-unit housing and stabilizing rent prices, indicate that we're not on a path to repeat the same inflationary pattern.

In addition, extreme events such as prolonged global conflicts or a significant supply shock—akin to the oil crisis of the 1970s—would be necessary to push inflation to such persistent highs. With today's oil prices far from those inflation-adjusted historic peaks, such a scenario seems unlikely. Furthermore, companies would need to continuously increase wages to accommodate the heightened cost of living, driving core inflation upwards alongside headline inflation, a dynamic not currently in evidence.

Conclusion: A Return to the Past or Moving Forward?

While it is theoretically possible for 1970s-style inflation to return and bring with it soaring mortgage rates, the current economic environment and market dynamics suggest that this is quite improbable. The unemployment rate remains low, and inflation rates are more reflective of the conditions seen over the last decade than those experienced in the late 1970s. As such, the era of disco may be over, and our economic considerations need to reflect the realities of the contemporary world, leaving past fears behind.

inflation, mortgage, economy