|Question||Draw a graph to illustrate and explain the inflation spiral that the U.S. experienced in the 1970s.
There is little indication today of the beginnings of a 1970s-style wage-price spiral. Then, as now, a serious oil price shock occurred, but today’s economy is more flexible in responding to difficulties and the country is more energy efficient than a generation ago, Bernanke said. Also, today the Fed monitors “inflation expectations.” If people believe inflation will keep going up, they will change their behavior in ways that aggravate inflation—thus, a self-fulfilling prophecy. In the 1970s, people were demanding—and getting—higher wages in anticipation of rapidly rising prices; hence, the “wage-price” spiral Bernanke cited. The inflation rate has averaged about 3.5 percent over the past four quarters. That is “significantly higher” than the Fed would like but much less than the double digit inflation rates of the mid-1970s and 1980, Bernanke said.