Inflation Spirals and Monetary Policy Limits

Prosperity Pulse Decoding Financial Frequencies · Sep 4, 2025 · 13m

The 1970s and early 1980s revealed the limits of Keynesian monetary policy when inflation spiraled out of control despite high unemployment. This episode reconstructs the stagflation crisis, examining how rising oil prices, wage-price spirals, and accommodative monetary policy combined to create double-digit inflation. We analyze the role of expectations in inflation—how workers and businesses, expecting future inflation, demanded higher wages and prices, creating a self-fulfilling prophecy. The episode traces Federal Reserve Chair Paul Volcker's decision to dramatically raise interest rates…