American workers are losing ground financially as wage growth fails to keep pace with inflation, which has been driven upward by surging energy prices, creating the clearest parallel to the 1970s economic crisis in four decades.
The Bureau of Labor Statistics reported that real average hourly earnings—what paychecks actually buy after inflation—have declined year-over-year. This means that despite nominal wage increases, the average worker can purchase less today than they could a year ago. The primary driver is the cost of energy, which has surged, pushing overall inflation higher.
The immediate consequence is a squeeze on household budgets not felt since the Carter administration. Consumers are paying significantly more to fill their gas tanks and heat their homes, leaving less disposable income for other goods and services. This dynamic suppresses consumer spending, the primary engine of US economic growth, raising the risk of a recession.
The current environment mirrors the "stagflation" of the 1970s—a toxic mix of stagnant economic growth, high unemployment, and high inflation. Back then, the inflation rate peaked at 14.8% in 1980. While current inflation is lower, the trajectory is alarming. The Consumer Price Index has been rising at its fastest pace in 40 years, with energy costs contributing heavily to the increase.
Federal Reserve Chairman Jerome Powell has acknowledged the challenge, stating that the central bank is prepared to raise interest rates to combat inflation. However, the Fed faces a difficult balancing act: raising rates too aggressively could tip the economy into a recession, while moving too slowly could allow inflation to become entrenched.
In the 1970s, the Fed under Paul Volcker eventually broke the back of inflation by raising interest rates to unprecedented levels, a move that triggered a severe recession but restored price stability. Whether the current Fed will need to take similarly drastic measures is the central question for investors and economists.
The energy crisis today differs in origin from the 1970s OPEC embargo. Current high prices stem from supply chain disruptions, the war in Ukraine, and underinvestment in fossil fuel production. However, the economic impact on American households is similar: less money for discretionary spending and a declining standard of living.
For investors, the 1970s playbook suggests that traditional stocks and bonds may struggle. During that decade, the S&P 500 delivered a real return of nearly zero. Commodities, real estate, and Treasury Inflation-Protected Securities (TIPS) were among the few asset classes that preserved purchasing power. As history rhymes, markets are now repricing assets based on the expectation of persistently higher inflation.
