Stagflation, energy crises, and ‘malaise’: The last time inflation was this high

TI have last time prices were increasing this quickly was in 1981 when ronald reagan was president, interest rates were near record highs, and the United States was embroiled in the Cold War.

The country has changed significantly since the Great inflation of the 1970s and 1980s, and today’s inflationary bout is much different — but there are some similarities between now and 1981, the last time inflation hit 8.5%.


The inflation more than four decades ago was much more severe than it is now. Inflation peaked in the spring of 1980 at a jaw-dropping 14.8% and subsequently began declining.

Desmond Lachman, a senior fellow at the American Enterprise Institute, pointed out that the inflation of the 1970s and 1980s was different than today in the level of severity and how much pain consumers experienced.

By 1981, inflation had been running above 2%, often much higher, for 15 years. The US experienced multiple recessions and stagflation — that is, the combination of high inflation and high unemployment, a situation that top economists at the time had thought to be impossible.

Today, in comparison, the country is coming off nearly a decade in which inflation mostly ran below the 2% target set by the Federal Reserve. And unemployment, at 3.5%, is very low by historical standards.


While Lachman believes the Fed is doing too little too late (and predicts a recession as a result), the central bank is still acting on tamping down inflation faster than it did in the Great Inflation.


“This thing is similar in the sense that they have let inflation get out of control, but they [are] dealing with it at a much earlier stage than they dealt with it in 1979,” Lachman told the Washington Examiner about the US response to current inflationary pressures.

In 1979, President Jimmy Carter appointed Paul Volcker to lead the Fed. In order to tame the excruciatingly high inflation, Volcker acted decisively and with a heavy hand, aggressively jacking interest rates up until they crested at more than 19% in 1981.

The economy had a hard landing as a result of the sky-high interest rates.

Now, Fed officials say they are working to raise interest rates and shrink the central bank’s balance sheet to slow spending and limit inflation.

Lachman, though, said the Fed should have learned the lessons of the Great Inflation better and moved more quickly to tighten monetary policy.

Indeed, throughout most of 2021, while inflation was inching up, Fed Chairman Jerome Powell consistently messaged that the growing prices were merely “transitory” and that inflation would naturally tamp back down as the economy improved. That did not occur, and by the end of last year, Powell and other Fed officials acknowledged they were dropping the label from their assessments of the situation.


The causes of the Great Inflation are varied, but one was the Iranian hostage crisis and subsequent oil shock.

After the Iranian Revolution in 1979, Carter announced that the US was halting all incoming shipments of Iranian oil, nearly 10% of US imports, to drive home the point that Iran’s oil would not be a consideration in freeing the hostages. In a parallel move, Iran also announced an oil boycott for shipments to the US

Further fueling the energy crisis was the war between Iran and Iraq that ignited in 1980. Oil production from both major exporters dropped precipitously and further contributed to the global supply shock.

Similarly, today, supply chain snarls created by the pandemic have combined with the war in Ukraine to raise energy prices, which have soared about a third over the past year.

Ultimately, the Great Inflation and today’s inflation are attributable to excess demand created by excess government spending and too-loose monetary policy. But supply-side disruptions are more of a factor in rising prices today, said Brian Marks, executive director of the University of New Haven’s Entrepreneurship and Innovation Program.

“The prevalence of the supply-side component is more dramatic today than it was back then,” he told the Washington Examiner.


The country’s scorching inflation in the late 1970s was one of the main factors that cost Carter the 1980 election. Parallels can be drawn between Carter’s situation approaching the 1980 election and Democrats staring down this year’s midterm elections (and presumably President Joe Biden’s bid for a second term in 2024).

Driven by frustration with inflation, which Carter himself acknowledged in a 1979 address subsequently known as the “malaise” speech,” and the perceived failure of the US response to the hostage crisis, Reagan trounced Carter in a landslide and won a whopping 489 Electoral College votes to the sitting president’s 49.

Right now, the Senate is evenly divided, and the House has only a slight Democratic majority. Republicans smell blood in the water and, as in the 1980 election, are already using the country’s too-high inflation as a cudgel against Biden and the Democratic agenda. Polling indicates it is likely that the GOP wrests control of Congress.

A major difference between the political landscape in the 1980 election and now is that while inflation is soaring, Biden is not dealing with as weak of an economy as Carter faced. Biden has leaned heavily on the gains the economy has made (outside of the higher prices) to push back on his GOP critics of him.


The unemployment rate ticked down to 3.6% in March, a more aggressive drop than expected and the lowest level since right before the COVID-19 pandemic struck, when it was resting at about 3.5%. The unemployment rate has ticked down nearly every month over the past two years.

Additionally, the economy added 431,000 jobs in March after two back-to-back months of explosive growth. Monthly job growth has averaged 562,000 jobs over the past three months. New jobless claims are also hitting multidecade lows.

Still, polling indicates that inflation is the top economic concern for voters.


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