The Last Great Inflation
The comments below are an edited and abridged synopsis of an article by Milton Ezrati
With inflation in the headlines in both the US and Canada, a look back at America’s last experience is in order. History doesn’t repeat exactly, but a look back offers ways to dispel nonsense and identify what is important.
The Arab oil embargo of 1973 dominates most references to the last great inflation. No doubt oil played a role, but problems appeared long before the embargo.
Inflation began to rise in the second half of the 1960s. After years of low inflation, consumer prices by 1966 were rising at a 3.5% annual rate; by1969 they were rising at a 6% rate.
This initial price pressure had two clear roots: The strain on the federal budget and the economy by simultaneously pursuing a war in Vietnam and a domestic war on poverty, and the willingness of the Fed to accommodate the government’s credit needs by creating a powerful flow of new money. The broad M2 measure of the nation’s money supply rose a rapid 8% a year on average during this time.
Ezrati discusses the growth of inflation during Nixon’s presidency; OPEC’s concern over the erosion of oil’s value; the Fed’s response and broad money supply; consumer price inflation reaching 14% in 1979; and the beginning of the end with Fed Chairman Paul Volcker.
Though much today is different, much also looks like the past. Washington is spending even more aggressively than it did 40—50 years ago. The Fed similarly has pursued an expansive monetary policy. Policymakers recently promised a more restrictive monetary posture, but announced plans for only the most gradual of moves. The US economy may get lucky, but the picture looks disturbingly like it did last time.