Why Stagflation Is Back on Some Traders’ Radars

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The most famous episode came in the U.S. during the 1970s. In 1971, President Richard Nixon reacted to balance-of-payments pressures by taking the U.S. off the gold standard. The decision set the stage for a decline in the value of the dollar against other currencies throughout the decade, which added to inflationary pressures at home. Nixon tried imposing wage and price controls to combat inflation without much success. Then in 1973, Arab members of OPEC placed an oil embargo on nations they blamed for supporting Israel in the Yom Kippur War. In the U.S., the embargo led to skyrocketing oil prices. Businesses passed along that cost but also cut back on production, as what economists call a supply shock made goods more scarce, adding to a rise in inflation. At the same time, cutbacks in production led to increased unemployment. By 1975, the so-called Misery Index — the sum of inflation and the unemployment rate — reached 19.9% before peaking in 1980 at 22%.

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