Inflation in 2023: How Does It Compare to What We Know?

Drawing parallels between the inflation experiences of the 1970s-1980s and our current cycle might not be as instructive as some think. There are a few important factors to keep in mind that reveal a stark contrast between then and now. 

First, the U.S. economy is significantly more open today. In the early 1970s, imports to GDP were a mere 5%, whereas now they make up more than 15% of GDP. The economy’s increased interconnectedness demonstrates that today’s landscape is influenced both internationally and domestically.

Second, the way that we work has also changed dramatically from the 1970s. Unions, which played a substantial role in the economy then (over 20% participation), now account for less than 10% of the workforce. This change in labor dynamics suggests that wage growth is not determined in the same way it once was. Additionally, the rise of remote work introduces a new dimension to the wage discussion. With the availability of remote workers both inside and outside the U.S., we have to question whether this trend will put upward or downward pressure on wages.

Third, similarly, the ongoing debate about the impact of artificial intelligence on the economy leans towards consensus on one front: AI will have deflationary effects. Neil Irwin highlighted more about AI’s effects on the economy in his article on Axios . Factor in the current deflationary impulse from China, and it becomes evident that this economic cycle differs significantly from the patterns in the 1970s and 1980s. China's influence on global markets today makes our current situation unique. 

In conclusion, it is most important to be pragmatic and acknowledge that the world has transformed. The 1970s and 1980s economy no longer provides a direct template for understanding inflation in 2023. This cycle is different and our approach to inflation must reflect the realities of the present, not the past.