From time to time, I dust off – that is, update – my chart comparing the inflation surge of the 1970s with the recent post-pandemic spike. Compared with the 1970s, we are now at a fascinating inflection point: it was precisely at this stage that the second wave of inflation began back then. Will we also see another flare-up this time?
The idea for comparing the inflation experience in the 1970s with the recent one first came to me in January 2023, when the post-pandemic inflation shock was still very much alive. Figure 1 shows the chart from that analysis (link).
Figure 1. US inflation (annual percentage change in the CPI) from Jan. 2015 to Dec. 2022 and (overlayed) from June 1967 to April 1977. Source: FRED of St. Louis Fed and J.Rangvid.
The similarity between the inflation trends in the United States during the 1970s and the 2020s is striking. Although inflation was higher in the 1970s – hence the different scales on the two vertical axes in Figure 1 – the correlation between the two inflation episodes is remarkably strong. For this reason, the chart attracted quite a bit of attention when I distributed it for the first time.
Back in early 2023, we could not know whether inflation would continue to mirror the 1970s’ pattern or take a different course. That is why I revisit and update the graph from time to time. Figure 2 shows the latest version, updated to the present day (and yes, I now master the art of a dual-scale chart – with the 1970s on the upper x-axis and referring to the right-hand y-axis and the 2020s on the lower x-axis 😊). Figure 2 also extends the comparison to include the late 1970s.
Figure 2. US inflation (annual percentage change in CPI) from Jan. 2019 to Aug. 2025 (lower x-axis and left-hand y-axis) and from June 1971 to Dec. 1984 (upper x-axis and right-hand y-axis). Source: FRED of St. Louis Fed and J.Rangvid.
The correlation between the two inflation episodes has continued to be surprisingly strong. The decline and subsequent stabilisation of inflation since its peak in 2022 have closely mirrored the pattern observed after the first inflation shock of the 1970s.
It is often argued that the inflation surge of the 1970s was driven solely by rising oil prices. To test that view, we can look at core inflation – that is, inflation excluding food and energy prices. This is shown in Figure 3.
Figure 3. US core inflation (annual percentage change in core CPI) from Jan. 2019 to Aug. 2025 and from June 1971 to Dec. 1984 (upper x-axis and right-hand y-axis). Source: FRED of St. Louis Fed and J.Rangvid.
Figure 3 shows that it was not only energy prices that drove inflation in the 1970s — just as energy prices alone did not cause the post-pandemic surge. In fact, developments in core inflation (which excludes food and energy prices) closely mirror those in overall inflation (Figure 2). Moreover, the correlation between the early-1970s and early-2020s patterns of core inflation is equally strong as for headline inflation.
We can now conclude that the inflation spike lasted for roughly the same duration in both periods. In each case, it took about three years from the onset of the inflation shock for price growth to be brought more or less under control. This was followed by a year and a half of relative stability — albeit with a brief uptick in early 1977 — before inflation flattened again. In the 1970s that calm persisted until early 1978, when inflation began to surge once more.
The interesting point here is that we are now at the same stage in the inflation process as when prices reignited in the late 1970s.
Four and a half years after inflation began to rise in early 2021, we must ask ourselves whether the experience of the 1970s will continue to repeat itself. One can only hope not — a renewed inflation shock would be painful. So, what are the possible scenarios?
Correlation is not causation
The fact that recent inflation developments so closely resemble those of the early 1970s does not, of course, necessarily mean that history will repeat itself. Nevertheless, there are several signs worth paying attention to:
- Inflation remains too high
Although US inflation has fallen from its 9% peak in mid-2022, it is still elevated. For about a year now, it has hovered around 3%, with no clear sign of further decline.
- Tariffs have not yet had their full impact
As I noted in summer (link), US companies are paying substantial amounts in customs duties — currently running at roughly USD 300 billion annually. That is a significant burden, effectively raising costs for importing firms. Until now, many firms have absorbed these higher expenses, but at some point, they are likely to pass the costs on to consumers. This would mean higher prices for imported goods and, consequently, upward pressure on inflation. When that happens, the key question will be whether it will be a one-off adjustment or the start of more persistent price increases.
- Lower US monetary policy rates
The Federal Reserve cut its policy rate at its most recent meeting, and markets expect further reductions. This figure shows the latest market probability tracker from the Atlanta Fed (link), shown in Figure 4.
Figure 4. Market probability tracker from 9 October 2025. Source: Atlanta Fed.
As the figure shows, markets implicitly expect the Federal Reserve to lower interest rates by around one percentage point over the next year.
Would cutting rates be wise? There is ongoing debate about the strength of the US labour market: unemployment remains low, but job creation has fallen sharply. However, robust GDP and investment figures, as well as generally loose financial conditions, suggests that lower rates could risk reigniting inflationary pressures.
While I understand the Fed’s concerns about the labour market, the decision to start cutting rates carries risk. Stimulating the economy at a time when inflation remains above target — and when several factors could soon push prices higher — is dangerous.
The Fed itself does not share that view — otherwise, it would not have cut rates at its most recent meeting — but if it were up to me, I would not have done it.
- Political pressure to lower rates
President Trump has made no secret of his desire for ultra-low interest rates. This is not what the economy currently needs, but his nomination of Stephen Miran to the Fed and his vocal pressure for rate cuts could influence monetary policy. If the Fed were to become dominated by Trump-aligned members and cut rates more aggressively than currently expected, inflation could rise significantly.
A few months ago, I explained why lowering rates to European levels, as Trump advocates, would be a mistake (link).
- A weaker US dollar
Many analysts expect the dollar to weaken further. Consensus forecasts put the EUR/USD exchange rate somewhere in the 1.20–1.25 range over the next year.
Exchange-rate predictions should be taken with a pinch of salt — exchange rates are notoriously difficult to forecast — but lower US interest rates could indeed push the dollar down. A weaker dollar would increase inflationary pressures by raising the cost of imported goods in USD terms.
- A smaller labour force
Mass deportations of undocumented immigrants under Trump’s policies will shrink the labour force. This is likely to drive up wages, which in turn could feed into higher inflation.
- Consumers expect higher inflation
Consumers’ inflation expectations remain elevated. The latest University of Michigan Consumer Survey reports an expected inflation rate of 4.7% over the coming year (link). Even over a five-year horizon, expectations remain well above the Fed’s 2% target, at 3.7%.
This is worrying: as we know, unanchored inflation expectations can become self-fulfilling. If consumers expect higher inflation, they demand higher wages, prompting firms to raise prices — and the cycle reinforces itself.
On the other hand…
While there are reasons to fear a renewed rise in inflation, there are also grounds for optimism.
- Market-based inflation expectations remain anchored
While households expect inflation to stay high, as just mentioned, financial markets are more sanguine. Long-term break-even inflation rates suggest investors expect inflation to average 2.4% over the next five years, much closer to the Fed’s target, as I noted in my last analysis (link). For the longer term (beyond 10 years), expectations remain near 2%.
- The Fed’s own projections signal confidence
By cutting rates, the Fed has effectively signalled that it does not fear a resurgence of inflation. Its latest projections show inflation averaging 3.0% this year, falling to 2.4% next year and 2.1% by 2027 (link).
- Real interest rates are restrictive
As noted in my previous analysis (link), real rates are higher than they have been for many years. In theory, this should help to suppress inflation. Yet, despite these tighter conditions, inflation has proved sticky at around 3%, suggesting that the disinflationary impact of high real rates may be weaker than expected.
Conclusion
Where does all this leave us?
The starting point of this analysis is the striking correlation between the inflation surge of the early 1970s and the post-pandemic episode. The unsettling part is that we now find ourselves at almost exactly the same stage as when prices began to rise again in the late 1970s. If inflation continues to follow the path of inflation in the 1970s, as the post-pandemic inflation experience has done until now, a renewed inflation flare-up is to be expected.
Luckily, correlation is not causation. Still, there are real economic reasons for concern. I am not suggesting anything close to the extreme levels of the late 1970s, when US inflation peaked around 15%. But a renewed increase of one or two percentage points – from the already too high current inflation rate – is unfortunately not unthinkable.
