Inflation Before the Oil Embargo

Before you start

What you'll be able to answer

Was inflation already rising across the rich world before the oil embargo?
Why did food and raw-material prices jump in 1972 and 1973?
What was the Federal Reserve doing before the embargo, and why is it argued over?

Where this sits

The Great Inflation — 1971 to 1982 · this module is lit

15 Aug 1971The United States stops turning dollars into gold, freezes wages and prices, and puts a tax on imports
Dec 1971–Mar 1973New fixed rates are agreed in December 1971, with the dollar devalued against gold; they break down, and by March 1973 the main currencies float
1972Food and commodity prices start to climb, while consumer prices across the rich world are already rising
Oct 1973Arab oil producers embargo shipments to the United States and the Netherlands
1974Imported crude costs US refiners far more than in 1973; in America inflation and unemployment rise together
Jan 1976At a meeting in Jamaica, IMF members agree that each country may choose its exchange-rate arrangement; gold is to lose its official price
1979Iran's revolution cuts its oil production, and the oil price rises a second time
Oct 1979The Federal Reserve raises its discount rate, and most of the other countries the series follows raise an official rate within two months
1982Bank lending to developing countries halves, and a debt crisis begins
1983Inflation is below its peak in all eleven countries the series follows

Prices were rising fast months before the oil embargo

On 13 June 1973 President Nixon froze most US prices for up to 60 days, the second freeze in two years. Prices had risen so fast since January that the public was dissatisfied, and Congress and the Administration were being urged to act. The Arab oil embargo was still four months away. West Texas Intermediate, a US crude oil, still cost $3.56 a barrel, the price it had fetched every month since December 1970.

Predict first

By mid-1973, which of these prices were rising fastest in US shops?

Prices were already rising across the rich world

Prices had been rising fast well before 1973, and in many countries at once. Across the OECD, the club of rich countries, consumer prices rose nearly 6 per cent in 1971 and about 5 per cent in 1972. In the first half of 1973 inflation ran faster still in Canada, France, Italy, Japan and the US, and several governments tried to hold prices down with controls. The oil price that stood still was a US one. Crude from the Gulf was already getting dearer: Saudi Arabian Light rose from $1.21 a barrel in 1970 to $1.82 in 1972. This whole run of high inflation is now known as the Great Inflation; on a longer dating, Congress's research service runs it from the mid-1960s to the early 1980s.

Bad harvests sent food prices up first

Food led the rise. Bad weather cut harvests in several parts of the world in 1972. The biggest shortfall was in the Soviet Union, which then bought very large amounts of grain abroad. The US was the main place extra supplies could come from, so demand for US crops jumped. The dollar's two devaluations, in December 1971 and February 1973, made US crops cheaper for buyers abroad and added to that demand. In 1973 US farm prices rose more than in any year since the First World War. A World Bank index of world grain prices, set at 100 for 2010 and not adjusted for inflation, went from about 29 in 1972 to about 56 in 1973, almost doubling. Dearer grain also meant dearer animal feed, and so dearer meat. The chart shows what reached US shops.

US food prices, change on a year earlier, 1971 to 1973Per cent, monthly, to September 1973, the month before the embargo

Source: U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Food in U.S. City Average (CPIUFDSL), via FRED, Federal Reserve Bank of St. Louis. Change on a year earlier calculated by Ceteris.