Monetary Policy

1977 vs. 1981: The Ghosts of Inflation Past

(National Review)
Buckle up: Inflation is at the beginning of a roaring comeback.

Inflation has returned. The question is for how long. Some see the rise in consumer prices as — to use a popular word — “transitory” blips poised to pass as pandemic-related quirks in the economy fade. Others perceive inflation as more likely to persist. Only time will tell who is correct. For now, though, history should give prophets of inflation’s ephemerality more pause than prophets of its persistence.

The chart above puts 2021’s year-to-date 4.1 percent increase in consumer prices in historical perspective. It shows the year-to-date (i.e., since December of the prior year) percent change in the Consumer Price Index that occurred by July — now the most recent month with official Consumer Price Index data, in each year between 1948 and 2021. By this measure, inflation is now off to a start at a pace unseen in 40 years. The last time the Consumer Price Index was more than 4 percent higher in July than in the prior December was in 1981. Before that, the last time year-to-date consumer prices had risen this much by July was in 1977. The policies that stir the halls of the White House and the Federal Reserve today, however, are ghosts of 1977 rather than 1981. And if we’re more in 1977 than in 1981, buckle up: Inflation is at the beginning of a roaring comeback.

America’s macroeconomic policy of the early 1980s could scarcely be more different from what it is today. Nineteen eighty-one was the year that Ronald Reagan, having campaigned on a pledge to quell inflation and boost growth, moved into the White House. His “supply side” agenda of tax reform and deregulation went on to successfully contribute to the taming of inflation. President Biden, by contrast, campaigned on higher taxes and more regulation. And he seems intent on following through.

On the monetary side, 1981 was also the year that U.S. Federal Reserve chairman Paul Volcker raised the Fed’s main policy interest rate to an excruciating 19.1 percent — the highest ever recorded. While Volcker did kill inflation, he also created a recession that launched unemployment into the double digits. Today, Fed chairman Jay Powell reassures Congress that full employment and low interest rates are his priority. Neither fiscal nor monetary policy, then, are being run in a way that precedent would suggest is necessary in order to reduce inflation.

The Carter administration in 1977 offers a far more plausible — even spooky — historical analogy for inflation-to-date under the Biden administration in 2021. In Carter’s first seven months in office, from December 1976 through July 1977, the Consumer Price Index rose by 4.11 percent. In Biden’s first seven months in office, from December 2020 through July 2021, the Consumer Price Index rose by 4.09 percent. Much like President Biden, President Carter advocated raising taxes — though in fairness to Carter, he did champion less regulation as a way of lowering consumer prices.

The Fed chairman in 1977, Arthur Burns, tended to dismiss many inflationary pressures as attributable to transitory disruptions affecting one sector and, therefore, as irrelevant to monetary policy. If that line of reasoning sounds eerily familiar, maybe you’ve seen today’s headlines. Burns found idiosyncratic reasons for dismissing cost pressures in sectors as varied as housing, cars, mobile homes, energy, and even women’s jewelry. If the U.S. today is even remotely analogous to the place it was in 1977, however, inflation is likely to persist — and, indeed, accelerate. For the year, inflation ended at 6.7 percent in 1977, 9 percent in 1978, 13.3 percent in 1979, and 12.4 percent in 1980. Then came 1981.

History tends to rhyme rather than repeat. And while only the passage of time can ultimately vindicate one set of economic prognostications over another, so far, it sounds as if 2021 may be haunted by the ghost of 1977. If so, until the incumbent party’s stint in the White House proves transitory, inflation is poised to persist.

Joseph W. Sullivan served at the White House Council of Economic Advisers as the special adviser to the chairman, as well as a staff economist, from 2017 to 2019.


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