Since 1913, the U.S. Bureau of Labor Statistics has been tracking inflation, charting the rise and fall of the Consumer Price Index, which measures how Americans spend on food, clothing, housing, energy, transportation, and more. In more than 100 years of history, inflation has made a comeback in post-war booms, severe recessions, oil crises and global pandemics.
Inflation was worst during the First World War
The worst inflation in U.S. history occurred during and after World War I, when the prices of almost all goods — food, clothing, household goods — more than doubled. In the post-war period, the single-year rate of price increases from June 1919 to June 1920 was as high as 23.7 percent, but overall, between the end of 1916 and mid-1920, prices rose by more than 80 percent.
As with most inflationary periods, the root cause of the inflation surge during World War I was an imbalance between supply and demand.
Steve Reed, an economist at the Bureau of Labor Statistics, said: "Wars, especially large-scale wars like World War I and World War II, require a lot of resources. Resources are diverted from the non-military sector to military use, which can lead to shortages, which in turn trigger frenzied bidding for surplus goods. ”
In 1920, regional Federal Reserve banks attempted to curb runaway inflation by raising discount rates dramatically. At that time, the Federal Reserve Bank did not yet have a unified national monetary policy, and high interest rates and economic slowdown plunged the United States into a severe but brief recession from 1920 to 1922.
The post-World War I period was one of the most volatile for U.S. consumer prices, Reid said. After soaring by more than 23 percent in 1920, prices fell by more than 15 percent in 1921.
Rationing during World War II led to a surge in demand after the war
Before World War II, the biggest economic concern for most Americans was not inflation, but deflation. In the early 30s of the 20th century, the Great Depression brought record unemployment and economic stagnation. Due to the lack of spending power, consumer demand dries up and prices fall. The deflationary rate between 1931 and 1932 was over 10 percent, the highest in U.S. history.
But the forces driving up prices during World War II were even stronger than during World War I.
"World War II was an all-out war that diverted a lot of manpower and resources to the cause of war," Reed said. In addition, there were many wartime restrictions on consumer behavior at that time. A large number of goods were rationed, not only for luxury goods, but also for basic household items. ”
During the Second World War, there was a shortage of all kinds of supplies: coffee, milk, meat, sugar, canned food, tires, gasoline, and so on. Because supply shortages could lead to inflation, the Roosevelt administration imposed price controls and rationing on in-demand goods, practices that curbed inflation during the war years but also paved the way for a postwar rebound.
When rationing and price controls were lifted after the war, pent-up consumer demand poured out like a tsunami. Soldiers returned home, and American families who had spent years diligently buying wartime bonds were desperate to spend their savings.
"People are hungry for shopping, but it takes some time for the economy to shift production from military to civilian goods," Reid explained. Before supply could match this pent-up demand, there was strong inflation in late 1946 and 1947. ”
The imbalance between supply and demand led to an inflation rate of 20.1% from March 1946 to March 1947. But even soaring prices couldn't dampen consumer enthusiasm, and from 1945 to 1949, American households bought 20 million refrigerators, 21.4 million cars, and 5.5 million stoves.
The Korean War sparked inflationary anxiety
By the end of the 40s of the 20th century, the frenzied years of economic prosperity after the Second World War had passed, and the economy even fell into recession. But this situation did not last long, and in June 1950, the United States became involved in the Korean War, and inflation came into focus again.
With memories of World War II-era shortages and rationing systems still fresh in mind, consumers rushed to buy household items, cars, and non-perishable food. This drove headline inflation, which was as high as 6.8% between 1950 and 1951, with food prices alone soaring by 10%.
Under the supervision of the newly established Price Stabilization Office, the federal government reintroduced price controls and rationing until the end of the war in 1953. Because shortages and rationing during the Korean War were not as severe as they were during World War II, there was no runaway inflation after the war.
In fact, the mid-50s to late 60s of the 20th century was a period of relatively flat inflation, when strong consumer demand was matched by a booming economy. Annual inflation during that period hovered between 1% and 3%.
But while memories of the "golden age of the U.S. economy" in the '50s are reminiscent, Reid said, this nostalgia masks the sharp fluctuations in prices that occurred during much of the 20th century.
"People often glorify the boom and relative price stability of the '50s, as if it was the norm, like it always has been," he said. But in reality, it was only a short period. Almost the rest of our history has been more troubled and the economy has performed worse. ”
70s: Stagflation
While war was the main driver of inflation in the first half of the 20th century, oil prices dominated the inflation movement in the second half.
In the 70s of the 20th century, the US economy suffered two "oil shocks". The first was in 1973 and 1974, when the Organization of Arab Petroleum Exporting Countries (OAPEC) imposed an oil embargo on the United States and the Netherlands for their support of Israel in the Fourth Middle East War. The second oil shock occurred in 1979, when the Iranian Revolution and the Iran-Iraq War disrupted oil production.
When the price of oil soars, so do the prices of gasoline, heating, electricity, and even food. During the first "oil shock" (December 1972-December 1974), headline inflation reached 10.5 per cent, energy prices rose by 19.3 per cent and food prices by 16.1 per cent.
The situation was even worse during the second oil shock, when headline inflation reached an all-time high of 14.8% between March 1979 and March 1980, the highest since World War II. Not only was inflation painful, but the economy of the late 1970s also fell into recession, a terrible double dilemma known as "stagflation."
"Usually high inflation is accompanied by an overheated economy – prices are rising because the economy is booming and wages are growing," Reid explained. But this was definitely not the case from 1979 to 1981. Stagflation is truly the 'worst of the two worlds' – high inflation, high unemployment, and slow growth. ”
Oil and gas prices soared in 1989 and 2008
1983 marked the end of a painful period of stagflation and the beginning of a period of relatively stable inflation for decades. But in 1989 and 2008, the surge in oil and gas prices led to brief periods of higher inflation.
In August 1990, Iraq invaded its oil-producing neighbour Kuwait, but months earlier, rising tensions between the two countries and the erratic behavior of Iraqi leader Saddam Hussein had pushed oil prices higher. In 1989, the price of crude oil more than doubled from a low of $16.04 per barrel to a high of $32.88 per barrel in 1990.
The soaring cost of oil and gasoline drove headline inflation in the United States to 6.3% in the 12-month period from October 1989 to October 1990. After the end of the Gulf War, energy prices fell back and inflation cooled.
In 2008, there was another brief period of inflation, in the middle of the Great Recession. The subprime mortgage crisis led to a collapse in the housing market, the near collapse of several major U.S. banks, a tumbling stock market, and a climb in unemployment. Just when the situation was bad enough, the price of oil soared from a low of $35.59 per barrel to a high of $127.77 per barrel.
The price spike was due to record growth in demand in China, the Middle East and Latin America, combined with overall uncertainty about global oil supplies. At gas stations, Americans are forced to pay a whopping $4.14 per gallon, from less than $2 per gallon. Headline inflation rose above 5% for the first time since 1991, but the U.S. economy, which fell into recession in 2009, briefly experienced deflation, the first since 1955.
Inflation was the highest in 40 years during the pandemic
The coronavirus pandemic has dramatically disrupted the global economy on a scale not seen since World War II. Hundreds of millions of people around the world have been forced to work from home, global supply chains have come to a standstill, and consumer goods are in general shortage.
Similar to during World War II, when pandemic restrictions were finally lifted in the United States, long-pent-up consumer demand contrasted with relatively limited supply, creating the perfect environment for inflation.
From June 2021 to June 2022, the 12-month inflation rate in the United States reached a high of 9.1%, the highest level in nearly 40 years. Food prices have risen particularly sharply, with grocery store food prices surging 11.4% over the same period. For most Americans, such a sharp price increase is truly surprising, as annual inflation was only 2.3% between 1991 and 2019.
"Nearly 40 years before the pandemic, price movements were relatively modest," Reid said. Inflation was the highest since the early '80s, but from a broader historical perspective, inflation during the pandemic wasn't particularly severe. It was nowhere near as bad as it was in the early '80s, the oil shock of the '70s, or after World War II. ”
Inflation has been a constant topic in the history of the U.S. economy. Prices soar whenever war, energy crisis, or other major events disrupt the balance between supply and demand. While the low inflation rate in recent decades has made people let their guard down, history has shown that the United States will not take inflation lightly, and that maintaining price stability requires the joint efforts of the government, businesses and consumers, as well as a high degree of economic management wisdom.