- The Washington Times - Thursday, June 5, 2008

Oil shocks in the 1970s jolted the economy. Gasoline and food prices spiraled and growth stalled. It could happen again, but will it?

Probably not, Federal Reserve Chairman Ben S. Bernanke says, because today’s economy is more resilient and better able to absorb such a painful punch.

Mr. Bernanke does not believe the United States will experience the out-of-control prices seen three decades ago, he told students at Harvard University, where he earned a bachelor’s degree in economics in 1975.

Back then, the economy suffered from a dangerous combination of stubborn inflation and stagnant growth. There are fears today that the U.S. may be heading in that direction again.

“We see little indication today of the beginnings of a 1970s-style wage-price spiral, in which wages and prices chased each other ever upward,” Mr. Bernanke said.

Then, as now, the U.S. endured a serious oil price shock, sharply rising prices for food and other commodities and subpar economic growth, he said.

Oil prices, which peaked at $135.09 a barrel in late May, have moderated at around $122 a barrel. Gasoline prices, however, have marched higher. They rose to a nationwide record above $3.98 a gallon Wednesday and are likely to reach $4 in the coming days.

Today’s economy, however, is more flexible in responding to difficulties and the country is more energy efficient than a generation ago, Mr. Bernanke said.

“Since 1975, the energy required to produce a given amount of output in the United States has fallen by half,” he said.

Companies are operating much more efficiently these days. Those crucial productivity gains can help to blunt inflationary forces. After 1973, productivity gains slowed sharply - averaging only about 1.5 percent growth per a year for the next 20 years, Mr. Bernanke said.

And, Fed policy-makers over the years have learned more about inflation and how to fight it, he said.

“Many things are better today than they were then,” Mr. Bernanke said, recalling the days of the ‘70s when drivers lined up on odd and even days to buy gasoline.

Mr. Bernanke’s remarks come one day after he said the Fed’s rate-cutting campaign was coming to an end because of increasing concerns about inflation. He took aim at the role of the weakened dollar in pushing prices higher. It was a rare public pronouncement by a Fed chairman about the U.S. greenback.

The Fed is paying attention to the extent to which consumers, investors and businesses believe prices will rise in the future. Monitoring those “inflation expectations” are important. If people believe inflation will keep going up, they will change their behavior in ways that aggravate inflation - thus, a self-fulfilling prophecy.

“Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve,” Mr. Bernanke told the Harvard students. “We will need to monitor that situation closely.”

Changes in current inflation expectations have been measured in just “tenths of a percentage point” as opposed to “whole percentage points” in the mid-1970s, he said. That highlighted the difference between how people now and then viewed inflation.

Paychecks today are shrinking as rising prices bite into them. In the 1970s, people were demanding - and getting - higher wages in anticipation of rapidly rising prices; hence, the “wage-price” spiral Mr. Bernanke cited.

The inflation rate has averaged about 3.5 percent over the past four quarters. That is “significantly higher” than the Fed would like but much less than the double-digit inflation rates of the mid-1970s and 1980, Mr. Bernanke said.

Mr. Bernanke suggested Tuesday the Fed would not be inclined to cut rates further given inflation concerns.

Many economists believe the Fed will hold rates steady at its next meeting June 24 and25 and probably through much, if not all, this year.

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