Economics
The Great Inflation
The Great Inflation refers to a period of exceptionally high inflation rates experienced in the United States during the 1970s. It was characterized by rapidly rising prices, reaching double-digit levels, and was fueled by a combination of factors including increased government spending, oil price shocks, and wage-price spirals. The Great Inflation had significant economic and social impacts, leading to policy changes and a shift in central bank priorities.
Written by Perlego with AI-assistance
Related key terms
1 of 5
11 Key excerpts on "The Great Inflation"
eBook - PDF- Alan S. Blinder(Author)
- 2013(Publication Date)
- Academic Press(Publisher)
5 the anatomy of The Great Inflation Some circumstantial evidence is very strong, as when you find a trout in the milk. —Henry David Thoreau Though inflation has been a major item on the national agenda in the United States since around 1966, it was the rapid acceleration of prices in 1973 and 1974 that thrust it into the kind of prominence that led President Ford to brand inflation as public enemy number one. The annual rate of increase of consumer prices averaged 4.6% during the 1969-1972 period—already more than double its historic value.^ Then inflation rose ominously to 8.8% during 1973, and to the dizzying height of 12.2% during 1974. This tremendous acceleration in inflation had profound effects on na-tional economic policy. The inflationary events of 1973 quite clearly led to a stiffening of price controls in the summer of 1973 (the so-called Freeze ΙΓ'),^ and may also help to account for the tightening of both monetary and fiscal policy. Furthermore, there is ample documentary evidence—to be presented in Chapters 7 and 8—that it was a preoccu-pation with inflation in 1974 that prevented any decisive monetary or fiscal policy actions that might have arrested the burgeoning recession. ' Based on the Consumer Price Index, which rose at an annual rate of 2.2% between 1949 and 1969. 2 See Kösters (1975, esp. pp. 23-26) and Shultz and Dam (1977, p. 74). 7 3 7 4 T h e A n a t o m y of t h e G r e a t Inflation On the contrary, the Federal Reserve gave its already tight monetary policies a further tightening in the second half of the year. And the President of the United States wound up in the absurd position of calling for a tax increase in October 1974, just when the recession was assuming epidemic proportions—a recommendation that might have been comical were it not for its grave consequences.
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
We have 22.5 • Indexing and Its Limitations 549 barely hinted at the causes of inflation, and we have not addressed government policies to deal with inflation. We will examine these issues in depth in other chapters. However, it is useful to offer a preview here. We can sum up the cause of inflation in one phrase: Too many dollars chasing too few goods. The great surges of inflation early in the twentieth century came after wars, which are a time when government spending is very high, but consumers have little to buy, because production is going to the war effort. Governments also commonly impose price controls during wartime. After the war, the price controls end and pent-up buying power surges forth, driving up inflation. Otherwise, if too few dollars are chasing too many goods, then inflation will decline or even turn into deflation. Therefore, we typically associate slowdowns in economic activity, as in major recessions and the Great Depression, with a reduction in inflation or even outright deflation. The policy implications are clear. If we are to avoid inflation, the amount of purchasing power in the economy must grow at roughly the same rate as the production of goods. Macroeconomic policies that the government can use to affect the amount of purchasing power—through taxes, spending, and regulation of interest rates and credit—can thus cause inflation to rise or reduce inflation to lower levels. Inflation in a Pandemic—A Return to the 1970s, or a Temporary Adjustment? The pandemic-induced recession caused all sorts of disruptions to our economy, including inflation. During the pandemic, the prices for goods like gas and cars fell as people shifted to remote work and canceled travel plans. But as the economy started to recover from the pandemic in early 2021, we started to see large increases in these prices. Higher prices were also fueled by the injections of cash into the economy through stimulus checks and unemployment benefits.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
A third wave of more severe inflation arrived in the 538 Chapter 22 | Inflation This OpenStax book is available for free at http://cnx.org/content/col12122/1.4 1970s and departed in the early 1980s. Visit this website (http://openstax.org/l/CPI_calculator) to use an inflation calculator and discover how prices have changed in the last 100 years. Times of recession or depression often seem to be times when the inflation rate is lower, as in the recession of 1920–1921, the Great Depression, the recession of 1980–1982, and the Great Recession in 2008–2009. There were a few months in 2009 that were deflationary, but not at an annual rate. High levels of unemployment typically accompany recessions, and the total demand for goods falls, pulling the price level down. Conversely, the rate of inflation often, but not always, seems to start moving up when the economy is growing very strongly, like right after wartime or during the 1960s. The frameworks for macroeconomic analysis, that we developed in other chapters, will explain why recession often accompanies higher unemployment and lower inflation, while rapid economic growth often brings lower unemployment but higher inflation. Inflation around the World Around the rest of the world, the pattern of inflation has been very mixed; Figure 22.4 shows inflation rates over the last several decades. Many industrialized countries, not just the United States, had relatively high inflation rates in the 1970s. For example, in 1975, Japan’s inflation rate was over 8% and the inflation rate for the United Kingdom was almost 25%. In the 1980s, inflation rates came down in the United States and in Europe and have largely stayed down. Chapter 22 | Inflation 539 Figure 22.4 Countries with Relatively Low Inflation Rates, 1960–2016 This chart shows the annual percentage change in consumer prices compared with the previous year’s consumer prices in the United States, the United Kingdom, Japan, and Germany.
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
We have 9.5 • Indexing and Its Limitations 239 barely hinted at the causes of inflation, and we have not addressed government policies to deal with inflation. We will examine these issues in depth in other chapters. However, it is useful to offer a preview here. We can sum up the cause of inflation in one phrase: Too many dollars chasing too few goods. The great surges of inflation early in the twentieth century came after wars, which are a time when government spending is very high, but consumers have little to buy, because production is going to the war effort. Governments also commonly impose price controls during wartime. After the war, the price controls end and pent-up buying power surges forth, driving up inflation. Otherwise, if too few dollars are chasing too many goods, then inflation will decline or even turn into deflation. Therefore, we typically associate slowdowns in economic activity, as in major recessions and the Great Depression, with a reduction in inflation or even outright deflation. The policy implications are clear. If we are to avoid inflation, the amount of purchasing power in the economy must grow at roughly the same rate as the production of goods. Macroeconomic policies that the government can use to affect the amount of purchasing power—through taxes, spending, and regulation of interest rates and credit—can thus cause inflation to rise or reduce inflation to lower levels. Inflation in a Pandemic—A Return to the 1970s, or a Temporary Adjustment? The pandemic-induced recession caused all sorts of disruptions to our economy, including inflation. During the pandemic, the prices for goods like gas and cars fell as people shifted to remote work and canceled travel plans. But as the economy started to recover from the pandemic in early 2021, we started to see large increases in these prices. Higher prices were also fueled by the injections of cash into the economy through stimulus checks and unemployment benefits.
- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
A third wave of more severe inflation arrived in the 202 Chapter 8 | Inflation This OpenStax book is available for free at http://cnx.org/content/col23729/1.3 1970s and departed in the early 1980s. Visit this website (http://openstax.org/l/CPI_calculator) to use an inflation calculator and discover how prices have changed in the last 100 years. Times of recession or depression often seem to be times when the inflation rate is lower, as in the recession of 1920–1921, the Great Depression, the recession of 1980–1982, and the Great Recession in 2008–2009. There were a few months in 2009 that were deflationary, but not at an annual rate. High levels of unemployment typically accompany recessions, and the total demand for goods falls, pulling the price level down. Conversely, the rate of inflation often, but not always, seems to start moving up when the economy is growing very strongly, like right after wartime or during the 1960s. The frameworks for macroeconomic analysis, that we developed in other chapters, will explain why recession often accompanies higher unemployment and lower inflation, while rapid economic growth often brings lower unemployment but higher inflation. Inflation around the World Around the rest of the world, the pattern of inflation has been very mixed; Figure 8.4 shows inflation rates over the last several decades. Many industrialized countries, not just the United States, had relatively high inflation rates in the 1970s. For example, in 1975, Japan’s inflation rate was over 8% and the inflation rate for the United Kingdom was almost 25%. In the 1980s, inflation rates came down in the United States and in Europe and have largely stayed down. Chapter 8 | Inflation 203 Figure 8.4 Countries with Relatively Low Inflation Rates, 1960–2016 This chart shows the annual percentage change in consumer prices compared with the previous year’s consumer prices in the United States, the United Kingdom, Japan, and Germany.
eBook - ePubThe Great Inflation
The Rebirth of Modern Central Banking
- Michael D. Bordo, Athanasios Orphanides, Michael D. Bordo, Athanasios Orphanides(Authors)
- 2013(Publication Date)
- University of Chicago Press(Publisher)
29 2.3 Reexamining the Evidence on The Great InflationThe supply-shock “story” of The Great Inflation, which was summarized in points (5) through (10) of section 2.1 , emphasizes four salient empirical observations:1. The Great Inflation was actually two episodes of sharply higher inflation, each of which was followed quickly by a disinflation —a fact we emphasized in discussing figure 2.1 . That inflation receded notably and quickly in the 1975 to 1977 period, and then again after 1980, is an important part of the story—one that is too often ignored.302. Blinder (1979, 1982) emphasized the strong symmetry apparent in the two inflation “hills” of figure 2.1 . In each case, the graph provides circumstantial evidence that something—to wit, the supply shocks—“came and went.”3. Core inflation rose and fell, but by less than headline inflation in each direction. That observation is also consistent with the notion that each episode was dominated by food and / or energy shocks that then disappeared.314. Ignoring the two inflation “hills,” core inflation rises from about 4 percent in the late 1960s and early 1970s to around 6 percent in the mid-to-late 1970s, but then ends up back at 4 percent in the mid-to-late 1980s.32
eBook - PDF- R. Leeson(Author)
- 2009(Publication Date)
- Palgrave Macmillan(Publisher)
5 The Great Inflation of the 1970s: Evidence from the Archives John Lodewijks and Robert Leeson 5.1 Introduction In 1985 the Duke University Manuscript Department, in conjunction with the Department of Economics, began an Economists’ Papers Project aimed at preserving the correspondence, writings, and related papers of a number of distinguished economists. These papers contain a treasure trove of useful information, particularly on the development of post-war economic theory. This chapter will use these and other archival sources to provide insights into a number of issues. One issue that featured promi- nently in the debates between various macroeconomists concerned the causes of, and cures for, inflation. This issue was implicit in the early skirmishes between Keynesians and their opponents but was very explicit during the inflationary experiences of the 1970s and beyond. Section 5.2 examines the growing Chicagoan animosity felt towards John Maynard Keynes. Section 5.2 also examines the interactions between three ‘permanent opposition’ Left Keynesians (Joan Robinson, Richard Kahn, Michel Kalecki), an American Keynesian (Sidney Weintraub) and Keynes’s biographer and disciple, Roy Harrod. (Daniele Besomi, 2004, should also be consulted as it deals with Harrod in far more detail.) Sec- tion 5.3 examines the validity of some New Keynesian assertions about Old Keynesians. Section 5.4 discusses more generally the insights into contemporary economics that can be provided by oral interviews by examining The Changing Face of Economics: Conversations with Cutting Edge Economists, by David Colander, Richard Holt, and J. Barkley Rosser (2004). Concluding comments are provided in Section 5.5. 91 R. Leeson (ed.), American Power and Policy © Palgrave Macmillan, a division of Macmillan Publishers Limited 2009
eBook - ePubInflation
A Theoretical Survey and Synthesis
- John Hudson(Author)
- 2016(Publication Date)
- Routledge(Publisher)
Chapter 4 Inflation in the United Kingdom and the United States Inflation in the United KingdomWe now come to examine how well our theory can explain the course of inflation in the UK and the USA, beginning with the UK. Figure 4.1 shows the course of wage inflation, price inflation and the unemployment rate over the period 1950–80. The first part of this period, until 1970, may perhaps be seen as one in which inflation by itself was regarded as a major problem only in as much as it affected the balance of payments. It has been characterised as a period of stop-go policies, in which the government would first deflate and then reflate the economy as its attention was concentrated on first the balance of payments and then the level of unemployment. It begins in the immediate postwar period, with both wages and prices increasing rapidly. As a response to this the then Labour government introduced what was to be one of the most successful attempts at an incomes policy. This had the immediate effect of reducing the inflation rate despite continuing supply side shortages, in particular labour. However, such controls were abandoned with the election of a Conservative government, and partly because of this and partly because of the Korean War wages and prices once more began increasing rapidly. From then until 1964 deflation and reflation were to succeed each other in fairly rapid succession. On need the government was always able to increase or decrease the level of unemployment, using the traditional means of fiscal and monetary policy, that is, tax rates, government expenditure and interest rates, an ability which those who argue for government impotency in this area would do well to consider.Take, for example, the period 1957–60, the beginning of which was marked by a crisis in July and August of 1957, which saw a large scale withdrawal of funds from London. In retrospect this seems mainly to have been caused by external factors, as the current account was at this time in comfortable surplus. In August the French franc was effectively devalued and this fed rumours of other possible currency realignments, which for the pound meant devaluation. None the less attention was focused on domestic causes, which it was felt were making the UK uncompetitive. One factor which disturbed many was the emergence of an annual wage round following the inflation associated with the Korean War. Partly in response to this feeling the then Chancellor of the Exchequer set up, in 1957, the Council on Prices, Productivity, and Incomes, in an embryonic attempt to influence wages and prices independently of the level of demand. This was, however, accompanied by a set of deflationary measures in September of that year. These, or at least the rhetoric which surrounded them, have a familiar ring. The aim was to control certain monetary aggregates, particularly government expenditure and bank advances. This it was argued would lead to unemployment only if the unions pursued excessive wage claims. Partly because of these measures unemployment increased and inflation fell throughout 1957 and into 1958, although a fall in world commodity prices was also a factor in the latter. With this, and with the restoration of relative calm on the international money markets, attention shifted once more to expansionist policies. During 1958 various expansionary steps were taken, which were supplemented by considerable tax reductions in the 1959 Budget. The effects of these were again to reduce unemployment and increase inflation, and the period ends with the government facing renewed worries about the balance of payments.
eBook - PDFKeynes
The Instability of Capitalism
- Fausto Vicarelli(Author)
- 2015(Publication Date)
CHAPTER 3 INFLATION, DEFLATION, AND THE RETURN TO GOLD During the 1920s the economic performance of the Western world, especially of Great Britain, offered Keynes new opportunities to reflect on the perplexities of the capitalist system. The war and the peace talks had led him to consider the latent causes of instability in the process of capital accumulation; he had prophesied the enor-mous dangers to freedom and the menace to the democratic social order that would ensue from impossible exactions on the defeated powers. Now, European reconstruction and obstinate policies aimed at restoring prewar monetary mechanisms brought him face to face with a new and virulent form of instability: inflation (or, antitheti-cally, deflation) and unemployment. Keynes's early warnings against inflation appeared in The Eco-nomic Consequences of the Peace. If European reconstruction were based on pointless inter-Allied squabbling over looting the losers' remaining riches, instead of fostering a recovery of production, he believed inflation was inevitable. Within two years the prophecy was tragically confirmed by German and Austrian hyperinflation. The smashing of these countries' monetary institutions prepared the groundwork for the democratic crisis in which the advent of unemployment provided a fertile audience for Naziism. In Russia, too, the period between 1920 and 1923 was marked by a dizzy price explosion which made the ruble about as valuable as printed paper. Between the summer of 1919 and the autumn of 1920, Britain and the United States both experienced rising prices—in Britain the increase was somewhat higher. There followed a period of de-flation which lasted until autumn 1922. The violent fluctuations in the purchasing power of money thus appeared as a concrete threat to any resumption of growth in 34 KEYNES: THE INSTABILITY OF CAPITALISM an atmosphere of stability.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2014(Publication Date)
- Openstax(Publisher)
Chapter 9 | Inflation 215 Visit this website (http://openstaxcollege.org/l/CPI_calculator) to use an inflation calculator and discover how prices have changed in the last 100 years. Times of recession or depression often seem to be times when the inflation rate is lower, as in the recession of 1920–1921, the Great Depression, the recession of 1980–1982, and the Great Recession in 2008–2009. There were a few months in 2009 that were deflationary, but not at an annual rate. Recessions are typically accompanied by higher levels of unemployment, and the total demand for goods falls, pulling the price level down. Conversely, the rate of inflation often, but not always, seems to start moving up when the economy is growing very strongly, like right after wartime or during the 1960s. The frameworks for macroeconomic analysis, developed in other chapters, will explain why recession often accompanies higher unemployment and lower inflation, while rapid economic growth often brings lower unemployment but higher inflation. Inflation around the World Around the rest of the world, the pattern of inflation has been very mixed, as can be seen in Figure 9.4 which shows inflation rates over the last several decades. Many industrialized countries, not just the United States, had relatively high inflation rates in the 1970s. For example, in 1975, Japan’s inflation rate was over 8% and the inflation rate for the United Kingdom was almost 25%. In the 1980s, inflation rates came down in the United States and in Europe and have largely stayed down. Figure 9.4 Countries with Relatively Low Inflation Rates, 1960–2014 This chart shows the annual percentage change in consumer prices compared with the previous year’s consumer prices in the United States, the United Kingdom, Japan, and Germany.
eBook - PDFTrading Economics
A Guide to Economic Statistics for Practitioners and Students
- Trevor Williams, Victoria Turton(Authors)
- 2014(Publication Date)
- Wiley(Publisher)
4 Inflation Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. Milton Friedman 1 WHAT IS INFLATION? Inflation tells us the changing (increasing) price of a range of goods or services; basically how much of something we can get for our money. The rate of change of prices – the speed at which the price of goods and services that are bought by households or businesses alter – is called inflation. But prices can also fall, in a process called deflation, sometimes termed negative inflation. Inflation is more common than deflation, or at least it has been in the last 50 years or so, and so it has become associated with changes in the price of goods and services. Historically, however, price falls were as common as price rises, as we will see later. Both inflation and deflation have advantages and disadvantages, which we will explore in more detail later in this chapter. THE HISTORY OF INFLATION Inflation has been around for a long time, but, as Figure 4.1 shows, the level of prices (the index) really only rose consistently and sharply in the UK from the 1970s onwards. This was after the US came off the gold standards and the Bretton Woods system of fixed exchange rates, which had prevailed after the Second World War, ended. Money was now backed by government fiat and trust rather than by gold. And exchange rates were no longer fixed but allowed to float freely. This seems to have led to a rapid rise in the level of prices or, in other words, to the Retail Prices Index. Before that, for hundreds of years, the level 1 Friedman, M., The Counter-Revolution in Monetary Theory (1970). 100 Trading Economics Retail Price Index (1987 = 100) 0 10 20 30 40 50 60 70 80 90 100 1264 1296 1328 1360 1392 1424 1456 1488 1520 1552 1584 1616 1648 1680 1712 1744 1776 1808 1840 1872 1904 1936 1968 2000 Figure 4.1 Price index over time.
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
