One hundred years of price change: the Consumer Price Index and the American inflation experience
The All-Items CPI increased at a 3.5-percent annual rate from 1913 to 1929 (see figure 1), but that result was arrived at via a volatile path that featured both sharp inflation and deflation. Inflation was modest in 1914 and 1915, around 1 percent, but accelerated sharply in 1916 and was historically high through the World War I period and the immediate postwar era. Prices then fell sharply during the steep recession of the early 1920s. The years 1923 to 1929 were a much quieter time for price movements, with the CPI showing modest price changes throughout the period, although the slight deflation in 1927 and 1928 is perhaps surprising given the general perception of the middle and later 1920s as a time of economic boom.
Prices in the World War I era
Data suggest that, despite the frustrations of the Housewives League, inflation was slight from 1913 to 1915, although some caveats are likely in order in considering the data of that period. The year 1916, however, saw rapid acceleration in the inflation rate. The 12-month change in the CPI rose from 3.3 percent in January to double digits by October. The World War I era and its aftermath, 1917–1920, then produced sustained inflation unmatched in the nation anytime since. Prices rose at an 18.5-percent annualized rate from December 1916 to June 1920, increasing more than 80 percent during that period.
Even a cursory examination of CPI component indexes of the World War I era reveals the breadth of price increases during that period: virtually every series shows sharp increases. Even the series that increased more slowly, such as housing and fuel, were half again more expensive in 1920 than they were in 1915. The prices of most foods, clothing, and dry goods more than doubled.6
The CPI as such didn’t exist throughout most of the period, although there certainly were BLS data documenting the price increases, especially for food. Indeed, it is likely that, to some extent, the high inflation of that time helped lead to the formal creation of the CPI, because, clearly, the need for an accurate measure of the cost of living is greater when the cost of living is changing rapidly.
It is beyond the scope of this article to analyze in detail the World War I–era economy, but surely, the inflation of that time was a result of the war effort. The war’s needs dominated policy and planning, with massive effects on resource allocation. One-fifth of the nation’s resources were devoted to the war effort in 1918,7 and the nonfarm labor force expanded sharply. Government involvement in the economy increased dramatically. Price controls were used, although in a rather haphazard way, with numerous agencies empowered to regulate specific prices. Beginning in August 1917, the U.S. Food Administration and the Federal Fuel Administration had authority over many retail prices.8 There was some rationing, notably of sugar,9 but not the extensive rationing the nation was to see during the World War II era.
Monetary policy during the era was expansionary and surely contributed to the inflation of the time. Money supply measures roughly doubled from 1914 to 1919, with gross national product rising only by about a quarter.10 Fiscal policy featured both massive borrowing, much of it in the form of “Liberty Bonds,” and an extensive set of tax increases and surtaxes.11 Whatever the explanation, the late 1910s stand as the most inflationary period in U.S. history.
6 Retail prices: 1913 to December, 1921, Bulletin No. 315 (U.S. Bureau of Labor Statistics, 1923), http://fraser.stlouisfed.org/docs/publications/bls/192301_bls_315.pdf. (See also Robert A. Sayre, Consumers’ prices, 1914–1948 (New York: National Industrial Conference Board, 1948).
7 Hugh Rockoff, “Until it’s over, over there: the U.S. economy in World War I,” Working Paper No. 10580 (Cambridge, MA, National Bureau of Economic Research, 2004), p. 2, http://www.nber.org/papers/w10580.
10 Rockoff, p. 32.
11 Ibid., p. 9.