The Great Stagflation, 19731980

In 1973 things began to get much worse, not only for the United States but for all oil-
importing nations. war between Israel and the rab nations precipitated a !uadrupling
of oil prices by the "rgani#ation of $etroleum %&porting 'ountries ("$%'). t the same
time, continued poor har*ests in many parts of the globe pushed world food prices higher.
$rices of other raw materials also s+yroc+eted. ,y unhappy coincidence, these e*ents
came -ust as the .i&on administration was lifting wage and price controls. /ust as had
happened after 0orld 0ar II, the elimination of controls led to a temporary acceleration
of inflation as prices that had been held artificially low were allowed to rise. 1or all these
reasons, the in- flation rate in the United States soared abo*e 12 percent during 1973.
4eanwhile, the U.S. economy was slipping into what was, up to then, its longest and
most se*ere recession since the 1935s. 6eal 78$ fell between late 1973 and early 1979,
and the unemployment rate rose to nearly 9 percent. 0ith both inflation and
unemployment unusually *irulent in 1973 and 1979, the press coined a new term:
stagflation:to refer to the simultaneous occurrence of economic stagnation and rapid
inflation. 'onceptually, what was happening in this episode is that the economy;s
aggregate supply cur*e, which normally mo*es outward from one year to the ne&t,
shifted inward instead. 0hen this happens, the economy mo*es from a point li+e % to a
point li+e in 1igure 7. 6eal 78$ declines as the price le*el rises. <han+s to a
combination of go*ernment actions and natural economic forces, the econ- omy
reco*ered. Unfortunately, stagflation came roaring bac+ in 1979 when the price of oil
soared again. <his time, inflation hit the astonishing