THE GREAT INFLATION.

THE GREAT INFLATION. I reacted strongly to the characterization of the period from 1979 to 1982 as one of “miserable results” because I had thought that there was rare general agreement among economists that this was a period when economic policy (the Fed’s monetary policy) was a great success. There’s another reason. It was a memorable period. Kids, just as your generation will always think in terms of the Great Recession you have been experiencing, there was a generation whose thinking was shaped by the double digit inflation during the period from 1979 to 1981. Inflation expectations remained high for years after inflation rates settled at lower levels. A lot of people continued to expect that high inflation would return. The inflation affected every day purchasing decisions. If you remember the rule of 72, an inflation rate of 12 % would roughly result in a doubling of the price level in six years—and inflation rates reached higher than 12%. Here is a chart of historical inflation rates by month. It shows that inflation reached a rate of 14.8 % in March 1980. People remembered that experience.

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