Inflated
Inflation is on everyone’s mind right now. Last year was the worst year for inflation in the U.S. since 1981. The average rate for 2022 was 8% but topped out in June at 9.1%.
It might surprise you to know the record for annual inflation in America hit 18% in 1918. The government began measuring inflation in 1914. In the years following World War I, the nation experienced five years of double-digit inflation in a row followed by negative inflation of 6.1% in 1922.
Disinflation returned in 1927, continued through the first few years of the Great Depression, and ended in 1934 when it again turned positive (with only a slightly negative downturn in 1938 and 1939). From that time to today, the nation has experienced some measure of positive inflation every year, with the exceptions of 1949, 1955 and 2009, when it was only slightly negative.
Many people recall the 1970s and early 1980s as a terrible period for inflation. From 1973 to 1982, inflation averaged 8.75% annually. The worst year was 1980 at 13.5%. Three other double-digit inflation years took place during that period: 1974 at 11%; 1979 at 11.3%; and 1981 at 10.3%. During the 1980s, the Federal Reserve took aggressive action to bring inflation under control.
Paul Volker became the chairman of the Federal Reserve in August 1979 and began to raise rates aggressively. The Federal Funds rate was already 11% when he took office. In September, he raised it .5%, an aggressive move at the time, but we hadn’t seen anything yet!
On October 8, the rate jumped again by 1.5% only to rise more aggressively 14 days later by 2.5%. In only two months, the Federal Funds rate went up 4.5%, from 11% to 15.5%. The rate began to fluctuate but reached a peak of 20% on four occasions in 1980-81. This aggressive action caused two recessions: a short one in 1980 from January to July and a deep recession starting in July 1981 and lasting until November 1982.
The pain caused by the Fed’s actions were real. In 1979, the inflation rate was 11.3%, Gross Domestic Product (GDP, a measure of growth in the economy) was 3.2%, and unemployment was 6%. By 1982, those numbers were painfully worse except for the inflation rate, which was down to 6.2%. However, the GDP was negative –1.8% and unemployment reached 10.8%.
Many (especially those who lost their jobs) consider the actions of the Fed unconscionable because it caused so much pain to the economy. The reality: the actions of Paul Volker set the stage for one of the longest and largest growth periods in U.S. history by finally taming inflation. His actions tamped down inflation for 37 years, or until it reared its head again in 2021.
Looking to these lessons of the past, the Federal Reserve has determined inflation must be tamed once again. Once again, there will be pain, although not as destructive as that experienced in the 1980s. On the bright side, we will all be better off when we get inflation back under control.