Everyone is well aware, at this point, that inflation has plagued our economy for the last 18 months. From eggs to beef, the sticker shock is real. While it’s been 40 years since we’ve seen inflation this high, we’ve had many periods of time where inflation was persistent, yet we were able to eventually get it under control.
Inflation is defined as a general increase in the prices of goods and services in an economy over time. There are various causes, including an increase in the money supply, a decrease in the supply of goods and services, or changes in demand.
If you’re in your 60s and 70s, you probably remember the last time inflation was such a hot button topic. Let’s explore a little history behind those periods in time when costs were skyrocketing not only at home but abroad.
- The 1920s: While economists talk more about The Great Depression of the 1930s, it’s important to mention the hyperinflation seen in the early part of the 1920s.?Due to the vast demand for American products during World War I, the monetary supply expanded, causing consumer prices to increase a whopping 20% in 1918. The Federal Reserve (created in 1913) acted swiftly (just like they’ve done currently) by raising the rate at which it lent money to banks, which in turn created an astronomical increase in loan interest rates. It’s important to note the United States was on the gold standard at this time as well, and the higher interest rates helped boost gold’s attraction. By 1921, inflation had been drastically reduced and The Roaring Twenties would begin. [i]
- The 1970s: While the inflation of the early 1920s was short-lived, another period of rising prices proved to last quite a bit longer. ?Macroeconomists often study this period as it’s known as a time when bad policies led to hyperinflation, topping out at 14% in 1980. While it would take its own paper to expand fully on the dynamics of the 1970s (there were various other factors, including the oil embargo), the policies of trying to achieve full employment coupled with the Federal Reserve holding interest rates steady led to an acceleration of the money supply while not reducing unemployment… The Fed basically failed in everything it was trying to achieve.[ii]
Jerome Powell has reiterated many times in the last year he will not pursue the “stop and start” policy of the 1970s, where the Fed was finally forced to raise interest rates but then lowered them prior to solving the inflation debacle, which then led to an increase in inflation again – a vicious cycle.
- 2021/2022: The inflation scenario we’ve been in for the last 18 months is multi-factorial. Historically low interest rates for almost a decade, coupled with the infusion of money into the economy during the pandemic, created a perfect storm for the 7-9% inflation we saw in 2022. Had the Fed started raising rates in 2021 as opposed to waiting until 2022, perhaps we wouldn’t have seen quite the pain in the markets we did in 2022. However, as history has shown – hindsight is 20/20.
Inflation is a complex phenomenon that can be influenced by a wide range of economic factors. Each period of higher inflation we’ve briefly explored had very different causes and effects. The latest inflation report shows inflation yet again slowing here in the U.S., so there’s cause for optimism. One thing remains certain, though – history has shown we’ve always been able to get inflation under control. Here’s hoping it’s sooner rather than later.
