Olivia Newton-John’s “Physical” was atop of the Billboard 100 chart. “Neighbors,” starring John Belushi, was No. 1 at the box office. And Ronald Reagan was wrapping up his first year as president. It was December 1981–the last time inflation was as high as it today.
Consumer prices in March 2022 rose 8.5% on an annual basis, setting a new 4-decade high. But is this inflationary cycle anything like the ’80s?
Forty years ago, the country was just coming out of “The Great Inflation,” where the annual rate peaked near 15%. While today’s inflation was seemingly triggered overnight by COVID-caused supply-chain issues and pandemic stimulus, The Great Inflation was caused by a long buildup of policies that started in the ’60s.
That said, both surges have two things in common: High government spending and easy money.
Back then, the country spent heavily on social programs and the Vietnam War. Then the Federal Reserve kept loose monetary policies to achieve full employment.
But subsequent inflation pushed so high the Fed tightened the money belt, raising its interest rate to near 20% to reverse course. As a result, people were priced out of borrowing money for homes and cars. Severe recession ensued and unemployment exceeded 10%.
After a painful correction, by mid-1983, inflation finally dropped below 3% for the first time in more than a decade.
In contrast, while much has been made of the current Federal Reserve Chair Jerome Powell calling today’s inflation levels “transitory,” many economists predict March’s 8.5% is the peak of this inflationary period and that levels will steadily decline the rest of the year.