Chart of the Day: The “Misery Index” – Not Looking as Miserable

The s0-called “misery index”, a measure of inflation plus the unemployment rate, isn’t looking so miserable any more.  For a while there we were starting to look a lot like the stagflation of the 70’s.  Now it looks more like the stagnant muddle through that has come to persist.

Of course, the falling unemployment rate is due in large part to the participation rate, but we’ve also seen real jobs growth so it’s not all bad news there.  And then the rate of inflation has remained low as aggregate demand has stagnated.  It’s not a pretty picture, but it could be a lot worse.



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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Benjamin Cole

    BTW, a lot people talk about the 1970s “stagflation.”

    Does anyone realize that in the last four years of the 1970s, 1976 through 1979, the real—real!—GDP expanded by 20 percent? That was after the 1975 recession.

    Does that sound like “stagflation” to you?

    It sounds like good growth to me, and yeah there was inflation. I would happily settle for 20 percent real growth in next four years.

    Good growth in the 1970s economy occurred with much higher marginal tax rates, less international trade, and market-setting unions, retailers and manufacturers (Big Steel, UAW, Sears etc). Banks were heavily regulated (Reg Q, anyone?), as were phones and transportation (youngsters may be surprised to learn that airline tickets used to have regulated rates). No Internet. No Craigslist.

    The Fed was aggressive—maybe too aggressive. But they could be that aggressive now, as there are far less structural impediments than back then. The risks of inflation today are the same as the Chicago Cubs winning the pennant.

    For real GDP growth, see Table B-3, Economic Report of the President

  • Matt McOsker

    How was the Fed aggressive in the seventies?

    The FFR started at just under 7% in 1970, and hit a high of 12% in July of 74, dipping back down to just under 5% in July of 76, then was raised quarterly until early 80’s. Look at this chart, which you can read several ways. The way I see it is the CPI tracked the FFR.

    Now we have zero rates and no inflation. So why can’t the FED cause inflation now? Maybe higher rates will trigger inflation.

  • Mark A. Sadowski

    Nominal interest rates are a terrible measure of monetary policy stance. Real interest rates (i.e. corrected for inflation) are slightly better. Furthermore although I like the fact you used core CPI in your graph, the CPI is a somewhat flawed measure of the consumer price level. The PCEPI is slightly better.

    The following are the quarterly real fed funds rates in blue and the quarterly annual rates of change in core PCEPI in red during the 1970s:

    The real long run neutral rate of interest in the US is about 2%. (Keep in mind that in the short run the neutral rate of interest can vary and tends to be lower when unemployment is high and higher when unemployment is low.) Note that the real fed funds rate was below 2% from 1970Q4 through 1978Q3 with the exception of 1972Q4 through 1974Q1 and 1977Q1. Thus by this measure, at least, monetary policy was expansionary 80% of the time for a period eight years in length.

    What about the behavior of core inflation? I think in order to discuss that one must compare the unemployment rate to the natural rate of unemployment (NROU):

    Note that unemployment was only significantly higher than NROU from 1974Q4 through 1977Q4.

    Core inflation averaged 4.9% 1970Q1 through 1971Q2. But notice that despite the fact unemployment remained below NROU after 1971Q2, inflation fell. Why is that?

    Nixon imposed wage and price controls in 1971Q3. During Phase 1 and 2, which lasted through the end of 1972, core inflation only averaged 3.1%. During Phase 3 in 1973Q1 and 1973Q2, which relaxed the wage and price controls, core inflation rose to an average of 4.2%. Phase 4 further relaxed wage and price controls and lasted through 1974Q1.

    Core inflation averaged 6.1% during Phase 4, and given the relatively low unemployment rate that is likely what the underlying core inflation rate had risen to. Furthermore there was pent up wage and price catching up to do as for two years inflation had averaged only 3.4% when the underlying core inflation rate had likely been well above 5%. Thus when wage and price controls were lifted in April 1974 core inflation immediately surged and averaged 10.1% in 1974Q2 through 1975Q1.

    The recovery from the 1974-75 recession was one of the swiftest on records with unemployment falling from 8.9% in 1975Q2 to just a hair above the 6.3% NROU in 1978Q1 and falling below NROU from 1978Q2 through 1979Q4. Consequently, although core inflation averaged 6.3% from 1975Q2 through 1978Q1, it rose to an average of 7.7% in the four quarters of 1979.

  • Benjamin Cole

    Mark Sadowski-

    Excellent, factual work as always.

    Yes, inflation was 7.7 percent in 1979. Still in single digits, and I might even add that the way CPI inflation was measured then arguably overstated inflation.

    Sheesh, the Fed has much more room to operate today. They could really blow the doors open and maybe—maybe—hit four or five percent inflation.

  • Matt McOsker

    This is my question – blow the doors open how? Double QE purchases each month? Remove IOR and let FFR drop to 0? What should they be doing?

  • Benjamin Cole

    Matt McOsker:

    Well, I am just a fruit-tree farmer, but I say yes to heavier (tapering up) QE purchases, and shrinking the IOER also.

    The Fed should announce aggressive targets—say, 6 percent unemployment and a 3.5-4.0 percent inflation ceiling–and commit to buying $85 billion plus $10 billion more for every month they don’t hit those targets So, $85 bil in Month 1, and $95 billion in month 2, etc.

    You want to know something? Back in the early 1980s, Chairman Volcker tightened the money supply and brought inflation down to 5 percent or so. The Wall Street Journal and the Reagan Administration howled that Volcker was being too tight and he should call off his horses.

    Now central bankers quiver and quake in their wing tips at the thought of 4 percent inflation….

    which would kept to pay down the national debt btw….

  • Up Side Down

    The comments suggest the author didn’t live thru those times in the 70s. It’s equivalent to lauding the great market conditions from Mar 2009 onwards as if the 2007-08 wipeout had never happened.

    Low growth in times of very high inflation is a disaster. Energy costs had quadrupled almost overnight. Cost increases that were way beyond wage growth left all but the most advantaged with seriously reduced purchasing power. Breaking entrenched inflationaary expectations took a very long time and is one of the few great Fed achievements. It is why CBs so fear inflation.