What History Tells Us About Inflation's Impact on Everyday Americans
What does the risk of high inflation mean for the days ahead? While it isn't possible to see into the future, a look at rates in the past can help provide some context.
Inflation rates are up 5 percent since May 2020, which signals the largest inflation increase in the U.S. since 1992.
What does the risk of high inflation mean for the days ahead? While it isn’t possible to see into the future, a look at rates in the past can help provide some context.
Since a little more than 100 years ago, the U.S. started measuring inflation rates. In the decades that followed, the country has experienced periods of high inflation, low inflation, and even deflation.
“While a moderate degree of inflation is generally conducive to economic health, rapid inflation can be disastrous,” says Thomas Brock, a financial Advisor at Best Small Business Loans.
Here’s a look at how the tracking of inflation began in the U.S., along with periods when inflation has had significant impacts on consumers and their living conditions.
The Start of the Consumer Price Index
The term inflation refers to the period-over-period increase in the price of commonly used goods and services. When inflation is high, it means that, in general, prices are on the rise.
In the late 1800s, the Bureau of Labor (now known as the Bureau of Labor Statistics) started tracking a cost of living index; this developed into the Consumer Price Index (CPI), which began in 1919.
In the decades that followed, the CPI continued to be a main factor used in determining inflation and making decisions. During the 1930s, for instance, it reflected deflation, as prices dropped an average of 10 percent each year from 1930 to 1933. Today it is the central metric used when calculating inflation rates.
Post-World War II Inflation
When World War II ended in 1945, changes in monetary policy and the movement of people and goods caused an uptick related to inflation rates. The CPI was 18 percent in 1946, and consumers felt the changes in their pocketbooks.
“Post World War II, people witnessed a lot of price hikes,” says Lewis Amin, the CEO at Netinfluencer.com, a digital platform based in San Francisco.
In an effort to stabilize inflation and unemployment, the Employment Act of 1946 was passed.
Regarding inflation rates, if the CPI stays below 5 percent, there generally are not alarm bells sounded. Rates between 5-9 percent typically cause concern, and double digits frequently mean lifestyle changes for many who are feeling the effects of rising prices.
While the U.S. experienced high inflation after the troops returned from war, other countries went through hyperinflation, which occurs when the inflationary rate for the year hits 1,000 percent or more, per most economists. Germany, for instance, suffered from such severe inflation that reports indicated a wheelbarrow of cash was needed to purchase a loaf of bread.
Hyperinflation is generally a sign that a country or region is undergoing an economic crisis.
Inflation in the 1970s
While prices continued to tick upward during the years following World War II, the rates further increased in the 1970s and sparked financial anxiety for much of the U.S. population. The rate hit double digits in 1974.
“In the 1970s, investors saw how inflation affected the stock markets negatively, causing huge amounts of losses,” Amin says.
In 1978, the inflation rate hit 29.78 percent, marking the highest rate recorded since the founding of the U.S. The recovery from this period was not quick: in the summer of 1980, inflation rates were still near 14.5percent, with a 7.5 percent rate of unemployment. A recession set in which lasted until 1982, with unemployment reaching nearly 11 percent before dipping again.
The influx in inflation during this time led to higher interest rates, which reached nearly 20 percent during the 1970s. This made it difficult for some to take out a loan, pay for a mortgage, and access credit. Many decided to readjust their budgets, reduce their spending, and shift their savings to different accounts.
COVID-19 Inflation Rates
After an inflation rate of 2-4 percent for several decades, the CPI rose above this average as countries and economies experienced the effects of the COVID-19 pandemic.
Now, “inflation is again on the rise, but it’s still tricky to understand whether it could get worse or end up getting better,” Amin says. “Economists are puzzled by the ever-changing market trends.”
While every inflation period has unique qualities, certain aspects seem to align whenever rates get high. For instance, real estate prices often increase. Those who own property or have a fixed mortgage could see the value of their home go up along with inflation.
“When homes increase by 15 percent, as we have seen in the last year, a $300,000 home is suddenly worth $345,000,” says Thomas Jepsen, founder of Passion Plans, a platform connecting architects and designers with home buyers.
The overall impact of inflation, however, is ultimately by many factors. We may have to wait several months or years to see the long-term effects of today’s rates.
By Rachel Hartman