One hundred years of price change: the Consumer Price Index and the American inflation experience
|Group||Subperiod, annualized percent change|
|All items less food and energy||1.5||4.1|
Why the return of inflation when it seemed to be guarded against and feared? One possibility is a change in the perspective of policymakers. Some have argued that inflation was tempered in the 1950s by a Federal Reserve that, believing that inflation would reduce unemployment in the short term but increase it in the long term, was willing to contract the economy to prevent inflation from growing. By the 1960s, however, the notion of the Phillips curve, a straightforward tradeoff between inflation and unemployment, ruled the day. Citing the curve, policymakers believed that unemployment could be permanently reduced by accepting higher inflation. This view led to expansionary monetary and fiscal policies that in turn led to booming growth, but also inflationary pressures.43 However much policymakers professed to fear inflation, the policies they pursued seemed to reflect other priorities. The federal government ran deficits throughout the 1960s, with steadily increasing deficits starting in 1966. Military spending increased with the Vietnam War, domestic spending increased, and taxes were cut.44 The inflation of the late 1960s might be seen as a classic case of demand outstripping capacity in a highly stimulated economy.
In any case, by 1968 serious inflation had returned, likely a symptom of a booming economy. The years ahead, however, would prove that serious inflation need not be accompanied by a boom.
- Inflation surges and price controls reemerge.
- Energy shocks generate inflationary pressure.
- Inflation persists through the seventies despite a sluggish economy.
- The decade of the early 1980s sees inflation reach its highest peaks since the 1940s.
- All-Items CPI: total increase, 186.4 percent; 7.3 percent annually
1968–1983 by the numbers
Largest 12-month increase: March 1979–March 1980, 14.8 percent
Smallest 12-month increase: July 1982–July 1983, 2.4 percent
Annualized increases in selected major components and aggregates, 1968-1983:
Food, 7.1 percent
Energy, 9.9 percent
All items less food and energy, 7.0 percent
Rent, 5.7 percent
Apparel, 4.2 percent
Medical care, 8.4 percent
Transportation, 7.3 percent
Services, 8.2 percent
Commodities, 6.6 percent
Gasoline, 9.1 percent
Prices of selected food items, 1975:
Apples, 34.0 cents/pound
Potatoes, 13.4 cents/pound
Bananas, 23.2 cents/pound
Rice, 47.0 cents/pound
White bread, 36.0 cents/pound
Round steak, $1.89/pound
Milk, 78.5 cents/half gallon
As can be seen from the path of the change in the All-Items CPI, shown in figure 5, the period from 1968 to 1983 stands out as the definitive era of sustained inflation in the 20th-century United States. The period spanned the boom-time inflation of the late 1960s, the frustrating stagflation of much of the 1970s, and the double-digit inflation of the early 1980s. More than ever before, inflation was the most pressing economic concern of the public and policymakers, and it proved to be an issue that dominated elections.
By this period, the composition of the American market basket, and thus the composition of the market basket used to calculate the CPI, had become much closer to that of the current era. The relative importance of food in the index continued to decline: in 1968 it was over 22 percent, while by the early 1980s it was under 20 percent. Notably, in 1978 the CPI published a new measure, the Consumer Price Index for All Urban Consumers (CPI-U), based on the spending patterns of a broader subset of the population.
43 Christina Romer, “Commentary,” Federal Reserve Bank of St. Louis Review, March/April 2005, part 2, pp. 177–178, http://research.stlouisfed.org/publications/review/05/03/part2/Romer.pdf.
44 For a thorough discussion of inflationary pressures from 1957 to 1968, see Norman Bowsher, “1968—year of inflation,” Federal Reserve Bank of St. Louis Review, December 1968, pp. 3–14, http://research.stlouisfed.org/publications/review/68/12/Inflation_Dec1968.pdf.