Over the past year, politicians and policymakers have watched rising inflation on both sides of the Atlantic with increasing unease. Rapid price increases are an inevitable result of the pandemic, them saidthen added that at least the situation was nothing like the disastrous inflation of the 1970s.

They need to look carefully at the evidence. Consumer price inflation hits 40-year high in March 8.5% Record 30-year high in U.S. this week 7% in England. It has two main reasons and has many similarities to the first oil shock in late 1973, when OPEC countries imposed an oil embargo on countries that supported Israel in the Yom Kippur War.

Then, as now, labor markets in both the U.S. and the U.K. showed signs of excess demand.America’s unemployment rate It fell to 3.6% in March, just one-tenth of a percentage point above its lowest level in more than 50 years, enabling workers to raise wages to an annual rate of 5.6%. in England, The latest labor market data The unemployment rate for the week was 3.8%, the lowest since 1973 and a record for the number of job openings. Total compensation increased by 5.4% annually.

Excess domestic demand in the labor market has exacerbated the global supply shock, raising the price of fuel and energy. In the mid-1970s, the reason was a powerful cartel of oil producers trying to punish the West. This time, the culprit is the lasting impact of the pandemic and a general desire to limit gas purchases from Russia, straining supply chains.

In addition to these global supply constraints, there are signs of a persistent domestic hangover in the labor market from the Covid-19 pandemic, which has reduced population numbers ready and willing Works in the US and UK.

So inflation in the US and UK is both a demand-pull and a cost-push phenomenon, just like the 1970s, requiring us all to relearn the lessons of that decade.

The first, a painful experience for President Joe Biden, is that running a high-pressure economy can have nasty economic and political consequences. Stimulating demand is seen as a policy with few negative effects, as it increases employment, reintegrates marginalized groups into the labor market and raises real wages.

But we have begun to rediscover that if prices rise faster than incomes, excessive fiscal and monetary stimulus and rapidly growing employment and nominal wages will not make the American middle class better off overall. Worse yet, those poorer people won’t give you any credit for helping other people get into work if their struggles intensify. Despite an extremely strong UK labour market, real household disposable income is still on track for the biggest drop this year since comparable records began in 1956.

This week, one of the founders of Europe’s single currency reiterated a second lesson. Otmar Issing criticises ECB rate hike too slow famous The Bundesbank was by far the most successful bank in the 1970s, when it acted decisively to reduce inflation and West Germany suffered only a mild recession. “The Fed has waited too long,” leading to “double-digit inflation and a deep recession,” he said. The British authorities made an even bigger mistake.

Given the history of excess demand and the current situation, it is clear that the Federal Reserve and Bank of England will need to significantly tighten monetary policy, removing much of the stimulus that currently exists. The difficulty, as Issing himself points out, is knowing how much to remove and how quickly.

Global supply shocks from rising energy, fuel and food prices will naturally reduce domestic demand, and even more in countries such as the UK, a net importer of these products.

Sadly, this brings us to our third and final lesson in the 1970s. Adjusting policy as successfully as the Bundesbank has been extremely difficult and requires luck and judgment.

The risk of a recession on both sides of the Atlantic is now very high. Maybe it’s too late, the inflation genie is out of the bottle, and monetary policy needs to produce a recession to drive it out of the system. Or, policymakers will be too cautious and too slow, allowing inflation to persist and become embedded in the economy, ultimately with the same consequences.

The road we all aspire to is narrow and in between these economic disasters. It is possible that we could eliminate high inflation without a severe recession, but the probability of such a favorable outcome is really low right now.

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