Consumers can't be blamed for feeling grumpy. With prices rising and interest rates creeping up, bargains are harder to come by and it's too late to land a 30-year fixed-rate mortgage anywhere close to 5 percent.
But should they be nervous? Are we getting close to some tipping point, when costs start to spiral?
As in the 1960s, war costs are helping to swell the budget deficit. As in the 1970s, turmoil in the Middle East is pushing up oil prices. As in the 1980s, interest rates are headed higher.
Remember those days: 13 percent inflation and 30-year mortgages at 18.5 percent. It took nearly 5 percent of a family's annual income just to fill up the car with gas.
Economists say there's no need to hyperventilate yet. Interest rates and inflation are still tamped down near their lowest levels in decades. Today's economy is structurally very different, and policymakers have learned from the mistakes made back then.
Still, an arched eyebrow could be forgiven.
"The dynamics of the inflation process are not well understood," Federal Reserve Bank of Philadelphia President Anthony M. Santomero said in a speech Tuesday.
"The economy rarely, if ever, evolves as smoothly as we forecast," he said. "Its dynamics are complex and events we cannot now foresee will undoubtedly come into play."
One of the biggest sources of unpredictability going forward is the consumer. Consumer spending accounts for two-thirds of the nation's economic activity, so consumers' reactions to rising prices and interest rates will have great economic effects.
If they just accept price increases, that could encourage businesses to raise prices further. If they cut way back on spending, economic growth could stall.
Fed officials, who try to stabilize the economy by targeting certain short-term interest rates, are watching consumer spending closely. Even officials with very benign views of the economy's probable course worry that if consumers and businesses expect more inflation, those expectations will fan price increases. So the Fed is conducting a campaign to assure the public that it is on the case and will not let the inflation genie out of the bottle.
Some Fed critics, however, believe the bottle is already uncorked. They point to recent rises in prices for energy, steel, lumber and other raw materials as developments that will force businesses to raise the prices of cars, appliances, houses and other products -- if consumers will accept them. And while overall inflation is very low, these critics worry that consumers already expect more price escalation because many household expenses have spiked. Think gasoline, food, health care, tuition, cable bills and houses in many markets.
On the whole, Fed officials depict the economic outlook for the coming year as generally sunny. Several have said recently that they expect the economy to continue to expand strongly, job creation to build steadily and inflation to remain tame.
While the Fed is getting ready to start raising short-term interest rates to prevent inflation from blasting off, policymakers have said they will be able to do so very gradually because inflation is still so low -- around 2 percent. By contrast, when the Fed launched a campaign to throttle inflation in 1979, it was already above 13 percent.
A bit of history may help to understand why the Fed is optimistic that it can navigate these tricky waters and bring the economy into a long, healthy expansion.
One cause for comfort is that the U.S. economy today is far more stable -- that is, less prone to bursts of high inflation and swings into deep recessions -- than it was in the 1970s and early '80s.
Since then, inflation dropped from a high above 13 percent in 1979 to a level so close to zero last year that Fed officials worried about the possibility of deflation -- a potentially damaging fall in the overall price level -- and are relieved today that it has edged up from such dangerous territory. (Inflation may be bad, but deflation can be worse. Think Great Depression.)
Recessions in the past two decades have been shorter, shallower and less frequent.
The nation lived through four recessions, covering a combined 49 months, between December 1969 and November 1982. The unemployment rate soared as high as 10.8 percent during the recession of 1981-82.
By contrast, the period since then has notched only two recessions that lasted a combined 16 months. During those contractions, the jobless rate went no higher than 7.8 percent.
Between those two downturns, from March 1991 to March 2001, the nation enjoyed continuous economic growth, the longest peacetime expansion on record.
Researchers have offered several explanations for this calming of the economic waters.
First, the economy's structure has changed in a number of significant ways. Deregulation of airlines, telecommunications, finance and other industries has fostered more competition, which restrains prices. Globalization and the removal of many trade barriers have exposed U.S. companies to more competition from abroad, forcing them to become more efficient and holding down price increases. Businesses cut costs and boosted their efficiency through advances in computers, telecommunications and other new technologies, making it easier to profit without raising prices.
The evolution of more complex national and global financial markets during the past quarter-century has made it easier and cheaper to finance a business or home purchase, while spreading financial risk more widely.
Fed Chairman Alan Greenspan has said frequently that these developments have made the economy more flexible, enabling it to more easily absorb the kinds of shocks -- a stock market crash, foreign currency crisis or terrorist attack -- that might have caused more economic damage decades ago.
Workers today are also far less likely than they were in the 1970s to get automatic wage increases when inflation rises. Union membership has fallen to 13 percent now from 24 percent in 1979. And in the 1960s and 1970s, "it was very common" for labor contracts, particularly for the industrial unions, to include cost-of-living pay increases linked to an index of inflation, said Ron Blackwell, director of corporate affairs at the AFL-CIO.
"That's very infrequent" now, he said. Unions don't press for such clauses anymore because "inflation hasn't been a problem since the early '80s," he said.
Another major reason the economy stabilized over the past 25 years was the Fed's campaign, begun in 1979 under Chairman Paul Volcker and continued under Greenspan, to bring down inflation through use of monetary policy, actions taken to control the amount of money in the economy. When the Fed tightened policy, it raised interest rates, which limited the money circulating in the economy, slowing growth; an easing did the reverse.
Volcker tightened like an unrelenting vise, sending interest rates sky-high and, in 1981-82, causing the nation's worst recession since the Great Depression. But he succeeded in bringing down raging inflation over time and convinced the public that the Fed could and would act to prevent prices from taking off again.
This marked a critical break with previous policy, following a decade in which poor Fed policy contributed to inflation and economic turmoil, many researchers agree.
The economy had begun overheating in the 1960s, when President Lyndon B. Johnson presided over a tax cut, then raised spending on both Great Society social programs and the Vietnam War. By 1971, President Richard M. Nixon was so alarmed about inflation that he imposed wage and price controls, which merely suppressed price pressures. The 1973 oil embargo and 1978 Iranian revolution drove up oil prices. Automatic pay increases linked to inflation helped feed "wage-price spirals."
Despite these inflation pressures, the Fed never tightened policy enough during this time to bring inflation down again to its pre-1965 level. Indeed the Fed eased at times to counter the recessions' effects, pouring extra fuel on the inflation fire. Even when short-term rates in the double digits appeared to be very high, they were really extremely low, after adjusting for inflation.
Many economists believe the inflation pressures alone could not have created long-term overall price inflation if the Fed hadn't provided the fuel in the form of easy money, or low interest rates. Cut off the fuel, or "accommodation" in Fed parlance, and you snuff out the fire. Without Fed accommodation, increases in the prices of some items would just force households and businesses to spend less on others.
Economist do debate why the Fed made such mistakes. Some have argued that policymakers then labored under several misconceptions about how the economy and monetary policy worked, noting that they had no experience with peacetime inflation. Others say the problem was the lack of political support until 1979 for the painful policies required.
Current Fed Governor Ben S. Bernanke is among the economists who argue that the Fed's mistakes during that decade made matters worse by sending inflation expectations out of control.
"The problem arises from the fact that, if policymakers do not react sufficiently aggressively to increases in inflation, spontaneously arising expectations of increased inflation can ultimately be self-confirming and even self-reinforcing," he said earlier this year, in a speech laying out some of the thinking on what went wrong in the '70s and what has gone right since.
This is one reason Fed officials today are concerned about how consumers will react to rising prices and interest rates.
"Expectations that prices will go up make people more willing to pay more," said Joseph Sirgy, a consumer psychologist at Virginia Polytechnic and State University.
Consumers' responses to price changes depend largely on their expectations, which vary depending on experience. For example, Sirgy said, consumers have come to expect prices on electronics to fall over time, making some unwilling to pay the initial prices for the newest gadgets, preferring to wait until they drop a bit.
This means younger people may have a harder time adjusting to the changing economic environment, said Sirgy and others who have studied consumer behavior. Younger people tend to have higher and more unrealistic expectations about life in general than their elders, making them more prone to disappointment. Older people consistently describe themselves as more satisfied than younger people, in part because they have lowered their expectations to bring them more in line with reality.
Older people, who have lived through inflationary periods, may expect prices to go up over time. But many young adults have been raised on ever-falling prices for clothes, cars and computers, and thus may be more upset by rising prices. However, it remains to be seen whether they will be less willing to pay them.
Similarly, families that had been planning to buy a house may react differently to rising mortgage rates. An older family may think rates below 7 percent are still pretty good compared with the past; a younger family may be disappointed because their peers snapped up home loans at rates below 6 percent.
Moreover, because most Americans' biggest store of wealth is their house, an older family with a valuable home and a low, fixed-rate mortgage may be in good financial shape to weather the coming changes. By contrast, a young renter with lots of credit card debt might have more trouble keeping up with rising expenses as the adjustable-rate interest payments on that debt head upward.
Along with weaker balance sheets, younger adults have less experience managing their finances through a period of rising borrowing costs and prices, said Larry D. Compeau, executive director of the Society of Consumer Psychology.
People who lived through the 1970s and '80s probably will respond by tightening their belts appropriately, he said. "But I fear for those who did not experience that time period," because they may not pull back as they probably should, he said. "Their responses may pose significant challenges for themselves and the economy."
Rising interest rates also may push some houses out of reach for many buyers, and force sellers to accept lower prices.
"People are absolutely right to respond powerfully to changes in interest rates, even if they are very low," said George Loewenstein, a professor of economics and psychology at Carnegie Mellon University. Rising rates "may have very serious effects on housing prices," he said, adding that the effects for some households with adjustable-rate mortgages "could be catastrophic."
Another danger for the economy is that older consumers will pull back too much because they lived through those bad times and now have an exaggerated fear of the rate and price increases to come.
One key to consumer response will be the pace of change, Loewenstein said. "People can get used to almost anything," he said, provided changes are gradual. He cited the proverb that says a frog dropped into boiling water will try to jump out, but a frog dropped into lukewarm water that is slowly raised to boiling stays in until too late.
This is one reason the Fed has signaled that it probably will raise rates at a "measured" pace. Its officials are well aware that many investors had serious trouble adjusting to a rapid series of Fed rate hikes in 1994, when it raised the target for a key short-term interest rate from 3 percent to 6 percent over 12 months. And Fed officials believe they can afford to raise their target more gradually from its current, very low, 1 percent level because inflation and other rates are also rising from very low levels.
Bernanke argued that improved monetary policy deserves a large share of the credit for the more stable economy, and said that makes him "optimistic for the future, because I am confident that monetary policymakers will not forget the lessons of the 1970s."