Every country in the world experiences inflation to some degree and it has been unavoidable. The United States has had several different times of inflation. By understanding what happened in the past few inflationary periods we can better understand how to predict and plan investments for future inflationary periods. But what is inflation exactly? Inflation is the decrease of purchasing power of a particular currency over time and is the main reason why simple goods such as coffee, bread, eggs, and milk increase in cost. Over time, the price of goods and services increases, meaning the value of the currency has less purchasing power to buy fewer goods and services with the same amount of capital.
Many people may not fully understand how inflation impacts all economies in regards to pricing, as a $100 bill is still the same bill representing the same amount of money. However, the goods and services that the $100 bill can purchase in today’s market is less than what it could have purchased in 1970. For example, in 1970, 1 dozen eggs cost on average $0.61 and is $4.09 in today’s money. 1 pound of bread was $0.24 and is $1.61 in today’s dollars. Half a gallon of milk was $0.66 in 1970 and is $4.43 in today’s dollars. The overall amount of groceries a $100 bill can purchase was vastly different in 1970 than it is today due to inflation.
From 1914 to 2021, the United States has averaged an inflation rate of about 3.2%. It is important to note that during the past 107 years, the United States went through turbulent times, such as World War 1, World War 2, and countless financial crises. The Federal Reserve of the United States has stated it aims to keep the inflation rate for the country at around 2% or preferably just under 2% and it is generally accepted by economists to be a healthy inflation rate.
The United States has experienced times of significant economic growth and times of severe economic downturns and as a result, the inflation rate has changed drastically over the decades. At its height, the highest inflation rate experienced in the United States was 23.70% in June of 1920, with the lowest inflation rate being -15.8%, happening just a year later on June of 1921. One of the main reasons behind the significant inflation and deflation was due to World War 1 and was later followed by the great depression in 1929.
Although the United States experienced volatile inflation during the 1920s, it was in the 1960s that started an era of inflation that lasted almost two decades, called The Great Inflation. The event started in 1965 and ended in 1982, which by the end of the Great Inflation, the United States experienced significant inflation (As shown in the graph below), with the impact lasting for decades in some cities. The Great Inflation did not start with significantly higher inflation, just above average in the beginning. But by the early 1970s, the inflation rate started to increase and by 1973, the inflation rate would increase drastically to 8.8%, increasing to 12% by the late 1970s and eventually topping out at just under 15% by the 1980s.
Below: A graph showing the inflation rate in the United States from 1950 to 2020, measured from data from the Federal Reserve Public Data.
The impact of the Great Inflation was catastrophic, during this time, interest rates rose to almost 20% and the prices of everyday goods and services increased drastically, reducing the purchasing power of American savings. The era of high inflation rates was closely studied and the determining factor behind the Great Inflation are numerous. One of the reasons was the monetary policies at the time heavily supported immense budget deficits, President Richard Nixon suspending the convertibility of the United States dollar into gold, causing the dollar to drop in value, which ultimately resulted in higher import prices.
The era of inflation only ended when severe steps were taken by the Federal Reserve that would tighten monetary policies, better control over money growth, lower reserve growth than normal, and introduce higher interest rates. Combined, the policies helped reduced the inflation rate and lead the United States to a period of growth, stability, and lowered the unemployment rate. The drastic actions taken by the Federal Reserve and the United States Government that was aimed at reducing inflation also loosely caused the recession of the early 1980s to some degree.
Since the Great Inflation and the recession of the early 1980s, the United States has experienced a relatively stable inflation rate and at times, declining throughout the decades. The 1990s was no exception to it, in that, the decade experienced economic growth and a stable inflation rate. One of the key drivers for a stable economy and inflation was the raising of taxes and restricted government spending. The inflation rate remained stable throughout the 2000s until the global recession of 2008, with inflation rates reaching about 5.4%. The trend of a low and stable inflation rate continued through the 2010s, until early 2021.
After the global pandemic of Covid-19, many industries in the United States were severely impacted, some positively and others negatively. The spike in inflation mainly came from parts of the economy recovering from the pandemic such as air travel and restaurants. Another significant reason for the inflation, which contributed to about 30% of the inflation in May is mainly due to the increased price of used vehicles. The demand for home appliances, washers, and dryers has increased significantly when compared to last year. An important note to add is that the United States government has also introduced a record amount of assistance into the economy. The Federal Reserve’s plan to combat long-lasting high inflation is by increasing interest rates.
The inflation rate from early 2020 to early 2021 has averaged about 1.5%, with a drastic increase in March of 2021, rising from 1.7% in February of 2021 to 2.6% in March and 4.2% in April. The rest of the year also saw similar increases with inflation reaching more than 5%. The inflation in May of 2021 reach 5%, 5.4% in June, and 5.4% in July. The recent increase in the inflation rate has not been seen in almost 14 years. Despite a relatively high inflation rate, the Federal Reserve is quite confident that the inflation rate will decline in the coming months and years.
Despite record inflation rates in more than a decade, when compared to other countries, the inflation rate in the United States is much more stable and lower. In 2020, Brazil experienced an inflation rate of 2.73% and China at 2.92%, much higher than the U.S.’s 1.2% during the same period. The historic inflation rate for the United States is stable when compared to other countries, many of whom experienced rates that are 10%, 15%, and some as high as 2.355%, such as the case with Venezuela.
The economy of the United States is currently experiencing turbulent, yet prosperous times with an uncertain future due to the global pandemic, supply chain difficulties encompassing many industries, inflation, record-high stock market, and a record-high real estate market. The Federal Reserve is currently trying to keep the inflation rate at around 2%, which is unlikely to happen and rates may continue to increase even continue into 2022. The United States will continue to see an inflation rate that is 5%+ in the coming months, even continuing into mid-2022 before the inflation rate starts to subside.
This post was written by Financialquazar on Fiverr, he’s an economics and business writer with an interest in history and inflation. We have some difficult financial times coming which is why I’ve created a series of several inflation posts written by three different perspectives. These posts are meant to waken the creativity in our minds. There are a lot of ways some people grew wealth during inflationary times, let’s stay positive and figure out the best course of growing our wealth during these times of unknown. Read Beginner Investing for Inflation for another post by Financialquazar. Subscribe for more business, sales and investing posts. Have a lovely day.
