The 1960s Warning: Why Higher Prices Might Not Be Temporary

Inflation has been America's unwelcome houseguest for five years. It doesn't leave. It doesn't even pretend it's leaving anymore. Prices sit roughly 30% above where they were before the pandemic, and the polite fiction that relief is always one report away is starting to wear thin.

Now the University of Michigan has dropped a report with a title that reads like a warning label: Risks of Entrenchment: Long-Run Inflation Expectations in Recent and Longer Historical Context. The researchers are not pointing at the 1970s. They are pointing at the 1960s. And the pattern they describe is not a spike. It is a ratchet.

This is not a story about a bad month of data. It is a story about what happens when people stop expecting prices to come back down. The 1960s did not begin with double-digit inflation. It began with a quiet belief that a little inflation was manageable. That belief was wrong.

What the 1960s Actually Did

The standard inflation narrative skips straight to the 1970s. Oil embargoes. Gas lines. Double-digit CPI. Paul Volcker and a 19% fed funds rate. It is a clean story with a villain and a hero.

The 1960s is messier. It is the story of a war and a domestic agenda funded at the same time, with no one willing to send the bill. President Johnson escalated Vietnam while launching the Great Society. Military spending jumped by $5 billion in the middle of 1965. Social spending expanded through 1967. The unemployment rate fell from 5.2% in 1964 to 3.5% in 1969. The economy was running hot, and the fiscal tap was wide open.

The critical mistake was not the spending itself. It was the refusal to tax for it. Johnson declined to press for an across-the-board tax increase in January 1966 to finance the war. The war was unpopular. Congress was restless. So the bill was deferred. Inflation became the financing mechanism.

By late 1965, consumer prices were climbing at a 3.7% annual rate. That number sounds quaint now. But the direction mattered more than the level. Inflation expectations began to drift upward. The Federal Reserve raised rates, and the first wave subsided by 1969, with the funds rate peaking at 8%. Then the 1970s arrived and the second wave hit from a higher starting point. Each recovery left expectations higher than before. The ratchet turned.

Richard Bernstein, the strategist at Janus Henderson, has been making this argument with a bluntness that cuts through the 1970s nostalgia. He sees the same ingredients now: fiscal easing and de-globalization pushing prices up across major economies. The "guns and butter" parallel is not about a specific war or a specific program. It is about a government stimulating an already stimulated economy and letting the price level absorb the cost.

The Numbers on the Table Right Now

The current data does not scream 1970s. It murmurs 1960s.

The September CPI reading sat at 3.7% year-over-year. The Federal Reserve's target is 2%. The economy has not touched that target in more than five years. By May, headline CPI had climbed to 4.2%, the highest since April 2023.

The headline number is not the interesting part. The composition is.

Stripping out shelter from core services, the sticky stuff that reflects domestic price-setting, still shows acceleration. Core services excluding housing rose 0.45% in a single month, with the year-over-year pace climbing to 3.3% from 2.7% at the start of the year. Shelter itself accelerated to 3.2% year-over-year. These are not categories that respond quickly to interest rate hikes. They are categories that respond to expectations, contracts, and wage settlements.

Tariffs are visible in goods. Energy is visible at the pump. But the persistent pressure lives in services. The Fed can wait out an oil spike. It cannot wait out a dentist's office that raises prices every January because it expects its costs to keep rising.

Wages tell their own story. Average hourly earnings rose 3.4% in the year through May. Inflation ran at 4.2%. Real earnings fell. Workers are not winning the race. For the Fed, that is a strange kind of relief: there is no wage-price spiral, no 1970s-style loop of workers demanding raises that fuel further price increases. But it also means households are absorbing the cost. Credit card delinquencies have reached a 15-year high. The total credit card balance hit $1.25 trillion in the first quarter, the highest first-quarter level on record. The consumer is not healthy. The consumer is coping.

Why This Is Not the 1970s (And Why That Matters)

The 1970s comparison is seductive because it offers a clear villain: oil. The 1973 embargo and the 1979 revolution sent crude prices through the roof, and inflation followed. If the current episode were a rerun, the script would be simple. Wait for energy to normalize. Watch inflation fall.

But the 1960s comparison is less comforting because it does not offer an external shock to blame. It offers a domestic mechanism. The inflation of the late 1960s was generated by fiscal policy, tight labor markets, and a willingness to tolerate rising prices as the cost of doing other things. The oil shocks of the 1970s did not create the inflationary regime. They poured fuel on a fire that was already burning.

The current moment has elements of both. There was an energy spike after the Iran conflict. There are tariff pressures. But underneath those shocks, the domestic price-setting machinery is running warm. The labor market is not tight in the 1960s sense, unemployment sits at 4.2%, roughly the natural rate, but services inflation is not waiting for a tight labor market to persist. It is responding to expectations.

The distinction matters because it changes the policy math. If inflation were purely energy-driven, the Fed could look through it. If inflation is being driven by expectations that have become untethered from the 2% target, the Fed faces a much harder problem. Rate hikes can crush demand. They cannot easily crush a belief.

The Entrenchment Problem

The University of Michigan's October survey found that consumers expect prices to rise 4.7% over the next year. The five-to-ten-year expectation climbed to 3.5%, up from 3.4% in September and above the 2024 range of 2.8% to 3.2%. These are not panic numbers. They are worse than panic numbers. They are comfortable numbers. They suggest that above-target inflation is becoming the baseline assumption.

The Michigan researchers identified a pattern across the inflationary episodes from the late 1960s through the 1980s. Expectations surged during shocks, then retreated. But each recovery left them higher than before. The next episode began from a higher floor and reached a higher ceiling. That is the ratchet.

Joanne Hsu, the director of the Surveys of Consumers, put it plainly: the data exposes "risks that elevated inflation expectations could become entrenched." The word "entrenched" is doing a lot of work. It means the expectation is no longer a reaction to current prices. It is a standing assumption about the future.

Once that assumption takes hold, behavior changes. Families buy things today because they believe prices will be higher tomorrow. Businesses raise prices sooner because they expect costs to keep climbing. Workers ask for larger raises to protect purchasing power. None of these behaviors are irrational. Individually, they are prudent. Collectively, they create the self-reinforcing cycle that makes inflation harder to extinguish.

The Fed has not reached its 2% target in more than five years. The longer that record extends, the more credible the alternative baseline becomes. Expectations do not need to become catastrophic to become problematic. They only need to become normal.

What the Fed Is Actually Doing

The Federal Reserve cut rates three times in late 2025, bringing the federal funds rate target range to 3.5% to 3.75%. Then it paused in January 2026 and has held steady since. The pause was not a pivot to easing. It was a recognition that the inflation data had stopped cooperating.

Governor Cook said in July that the risks from high inflation concern her more than the risks from the labor market. The price index the Fed targets rose 3.7% in the twelve months through June, 1.7 percentage points above target. She noted that the Fed has not reached 2% in more than five years. That is not a talking point. It is a confession of institutional failure, delivered in the measured language of a central banker.

The policy problem is structural. Rate hikes work by cooling demand. They do not work by rewriting expectations. If expectations are the problem, the Fed is using a hammer on a screw. It can tighten until something breaks, the labor market, credit markets, consumer spending, but the expectation ratchet does not reverse simply because demand falls. It reverses when people believe the central bank will do whatever it takes for as long as it takes. That belief has not been rebuilt.

Some voices on the outside see the money supply angle. The M2 measure grew from $21.61 trillion in February 2025 to $22.67 trillion in February 2026, a 4.9% increase. That is not runaway money growth. But it is the kind of steady expansion that keeps a fire lit.

The Fed's own forecast a year ago projected 2.4% inflation for 2026. That forecast is now stale. The central bank is not guiding the economy toward target with confidence. It is managing a drift.

What to Watch (Not What to Buy)

This is not a prediction business. It is an observation business. The signals that matter are not the ones that produce a single dramatic headline. They are the ones that show whether the ratchet is still turning.

Watch the University of Michigan long-run expectation reading. If it holds above 3.5% for several consecutive months, the entrenchment thesis gains weight. If it retreats back toward the 2.8% to 3.2% range of 2024, the 1960s parallel weakens.

Watch core services excluding shelter. That is the cleanest read on domestic price-setting pressure. If it stays above 3% year-over-year while energy and goods prices stabilize, the inflation is not coming from the outside. It is coming from the inside.

Watch the gap between wages and prices. Real earnings have been negative for most of the past year. If workers begin to win larger settlements, the wage-price spiral that is currently absent could become present. If they do not, the consumer stress will deepen, and the Fed will face a choice between inflation and recession that it has spent five years trying to avoid.

Watch the language. When central bankers stop saying "transitory" and start saying "entrenched," the regime has already shifted. The 1960s did not announce itself with a headline. It announced itself with a series of small decisions to tolerate a little more inflation than the last time. The bill came due later. It always does.