Inflation isn't caused by high oil prices. But then you knew that.
The key difference – and the primary reason why stagflation is highly unlikely to be anything but a short-term problem, if a problem at all – lies in the history of the man presently leading the Federal Reserve. Ben Bernanke co-wrote a paper with his colleagues Mark Gertler and Mark Watson for the Brookings Institution in 1997 titled “Systematic Monetary Policy and the Effects of Oil Price Shocks". The point made by Bernanke and friends in this paper was that every U.S recession from 1971 to 1997 occurred during periods when oil prices rose and the Federal Reserve raised interest rates as well. Not surprisingly, when faced with a stagflation scenario during his first term as chairman, Bernanke has held true to his prior academic work and has cut interest rates aggressively rather than raise them as had been done in the past.The key difference – and the primary reason why stagflation is highly unlikely to be anything but a short-term problem, if a problem at all – lies in the history of the man presently leading the Federal Reserve. Ben Bernanke co-wrote a paper with his colleagues Mark Gertler and Mark Watson for the Brookings Institution in 1997 titled “Systematic Monetary Policy and the Effects of Oil Price Shocks". The point made by Bernanke and friends in this paper was that every U.S recession from 1971 to 1997 occurred during periods when oil prices rose and the Federal Reserve raised interest rates as well. Not surprisingly, when faced with a stagflation scenario during his first term as chairman, Bernanke has held true to his prior academic work and has cut interest rates aggressively rather than raise them as had been done in the past.The above is an excerpt from a Schwab report listed in this post.