Echoes of the 1970s? Energy Prices, Wage Stagnation and Inflation Resurface

U.S. wages are falling behind prices again, and MarketWatch columnist Brett Arends argues the combination of weak pay, an energy shock and rising inflation is starting to resemble the 1970s. His case rests on the September jobs report released by the Labor Department on Friday, Oct. 2, and on inflation estimates from the Federal Reserve Bank of Cleveland.

What the September data shows

Average hourly earnings rose 0.13% in September, about 5 cents an hour before taxes, according to the Labor Department. Over the same month, consumer prices rose an estimated 0.53%, roughly four times as fast, according to the Cleveland Fed's estimates. On an annualized basis, that monthly price increase works out to 6.5%.

The gap is not limited to one month. Over the past year, average earnings rose 3% while prices rose 3.6%. In inflation-adjusted terms, Arends writes, rising prices have erased essentially all of workers' pay gains over two years, leaving real hourly earnings back where they were in the fall of 2024.

The same report showed job creation slowing sharply, with September's gain at less than a third of what economists had forecast. Over the past year, nearly 1 million fewer native-born Americans had jobs, while about half a million more immigrants were employed.

The weakness in pay comes at a time of rising productivity and a booming stock market.

The energy shock

Arends identifies energy as the main source of the price pressure. Iran's takeover of the Strait of Hormuz has set off an energy crisis that the U.S. government has so far been unable to stop, and diesel prices have risen sharply. Arends writes that higher diesel prices mean the price of everything consumers buy will keep rising.

He compares the episode with the two OPEC oil embargoes of the 1970s, which drove the inflation of that decade. Over the 1970s as a whole, real average wages fell 7%.

The official September consumer price index was scheduled for release on Oct. 14.

How financial assets fared in the 1970s

The column's broader point is about what that decade did to investors. According to data from New York University's Stern School of Business, the S&P 500 returned a total of 4% above inflation between Jan. 1, 1970, and Jan. 1, 1980. That is 4% for the entire decade, not per year, and before taxes and fees.

Other mainstream assets lost ground in real terms over the same period:

• Treasury bills and short-term cash lost 11% after inflation.
• Investment-grade corporate bonds lost 17%.
• 10-year Treasury bonds lost 35%.

Two asset classes did well. Energy stocks doubled in value after inflation, according to data from Dartmouth finance professor Kenneth French. Gold rose more than 500% after inflation, helped by the fact that governments had held its price down for the previous four decades.

One instrument that did not exist in the 1970s is Treasury Inflation-Protected Securities, or TIPS, whose principal adjusts with the consumer price index. Arends notes that TIPS prices have fallen this year, which has pushed their real yields, the return above future inflation, to levels rarely seen. Shorter-term TIPS offer real yields of about 2.5 percentage points a year, and longer-term TIPS up to about 3.3%. Longer maturities carry more price volatility.

September CPI and the October jobs report

• The official September CPI, compared with the Cleveland Fed's 0.53% monthly estimate.
• The October jobs report, and whether average hourly earnings keep trailing inflation.
• Diesel and oil prices, and any change in the situation in the Strait of Hormuz.
• Real yields on TIPS, which this year reached levels rarely seen.