What the 1970s Inflation Actually Teaches Us
Every episode of rising prices invites comparison to the 1970s. Understanding what actually happened then — and why — is more complicated than the political memory admits.
The Great Inflation of 1965 to 1982 is the defining economic episode in the memory of American monetary policy. Every subsequent period of rising prices has been measured against it; every central bank decision since Paul Volcker's disinflationary shock of the early 1980s has been made in its shadow. The lesson drawn from it — that central bank credibility, once lost, is catastrophically expensive to recover, and that monetary accommodation of supply shocks generates wage-price spirals that are difficult to arrest without severe recession — has shaped Federal Reserve behavior for four decades.
The lesson is real. It is also incomplete in ways that have consistently produced misreadings of subsequent inflationary episodes, including the 2021-23 inflation that generated intensive comparison to the 1970s and that resolved rather differently.
Understanding what the 1970s inflation was actually about — and what it was not about — requires looking past the monetary policy narrative that has dominated its political memory.
What actually happened
The Great Inflation was not primarily a monetary phenomenon, though monetary policy played a significant role. It had structural causes that the conventional narrative underweights.
The first OPEC oil shock of 1973, which quadrupled the price of oil, transmitted a massive supply shock through an economy whose industrial structure was significantly more energy-intensive than the contemporary US economy. Oil price increases raised production costs throughout the economy — not just at the gas pump but in every industry that used energy as an input, which in 1973 meant most manufacturing industry. The inflation of 1973-74 was primarily an energy price shock that flowed through to core prices.
The Federal Reserve's response to this shock — expansionary monetary policy that attempted to buffer the growth impact of higher energy prices — contributed to the persistence of inflation by validating the initial price increases and providing the monetary base for wage demands that compensated for them. This is where the monetary policy narrative is correct: accommodation prevented the supply shock from being absorbed through a one-time price level adjustment; instead it generated a continuing inflation dynamic.
But the accommodation was not simply a policy mistake. It was the product of a political economy in which full employment was a congressionally mandated objective (the Full Employment Act of 1946, updated by the Humphrey-Hawkins Act of 1978) and in which the political costs of allowing recession to absorb supply shocks were considered prohibitive. The Federal Reserve was doing, roughly, what the political system expected it to do.
The role of labor market institutions
The feature of the 1970s inflation that is most consistently underweighted in the monetary policy narrative is the role of labor market institutions. The 1970s were the peak of American union density — approximately 30 percent of the private sector workforce was unionized in 1970 — and union contracts typically included cost-of-living adjustment (COLA) clauses that automatically raised wages when inflation rose.
These clauses transformed what would otherwise have been a transfer from workers to energy exporters (OPEC) into a wage-price dynamic: energy prices rose, COLA clauses triggered wage increases, higher wages raised production costs, prices rose further, triggering more COLA adjustments. The spiral that characterized the 1970s inflation was not primarily a monetary phenomenon; it was an institutional one, rooted in labor market contracts that were designed to protect workers from inflation and that, in doing so, perpetuated it.
The reason this episode cannot straightforwardly recur in the contemporary economy is that the institutional conditions that produced it no longer exist. Private sector union density is 6 percent, and COLA clauses are rare; there is no automatic wage-price mechanism of the kind that operated in the 1970s. The 2021-23 inflation, which peaked at 9 percent and generated extensive comparison to the 1970s, resolved without a wage-price spiral, in part because the institutional foundation for one does not exist.
What Volcker actually did
Paul Volcker's disinflationary shock of 1979-82 — the decision to allow the federal funds rate to rise to 20 percent to break inflation expectations — is remembered as a triumph of central bank independence and monetary discipline. The memory is accurate but selective.
Volcker's achievement was real: inflation declined from 13 percent in 1979 to 3 percent in 1983, and the credibility of Federal Reserve inflation-fighting that was established has been central to macroeconomic stability since. The cost was also real: the back-to-back recessions of 1980 and 1981-82, which produced unemployment rates of nearly 11 percent, were the most severe since the Great Depression. Millions of people lost jobs; manufacturing industries that were already vulnerable to import competition were devastated by the high dollar that tight monetary policy produced; the farm sector experienced a crisis that wiped out thousands of family farms.
The lesson that economists and central bankers drew from the Volcker disinflation — that central bank credibility is worth preserving at high cost — is not wrong. But it abstracts from the distributional effects of how the disinflation was achieved. The costs fell primarily on manufacturing workers and farmers; the benefits — stable prices, a strong dollar, low interest rates for the subsequent two decades — accrued to financial capital and to households with assets.
This distributional pattern has consequences for the political legitimacy of central bank independence that are not adequately reflected in the standard monetary policy narrative. The Fed's credibility was purchased with a recession that was concentrated in specific communities and industries; those communities have not forgotten, and the political resentment of the Fed as an institution run for Wall Street rather than Main Street has historical roots that the monetary policy narrative does not acknowledge.
The 2021-23 episode
The inflation that began in 2021, peaked at 9 percent in mid-2022, and had largely resolved by the end of 2023 was extensively compared to the 1970s. The comparison turned out to be wrong, in ways that were predictable from the structural analysis above.
The 2021-23 inflation was primarily a supply shock driven by the COVID pandemic — supply chain disruptions, labor market mismatches, energy price increases (partly from the Russia invasion of Ukraine) — combined with extraordinary monetary and fiscal stimulus. It was not accompanied by a wage-price spiral, because the institutional conditions for one do not exist. When the supply shocks resolved — which they did, as supply chains normalized and energy prices declined — the inflation resolved with them, at the cost of a significant but not catastrophic increase in unemployment.
The Federal Reserve's tightening cycle, while appropriate, did not have to be as severe as the Volcker shock to achieve resolution; a moderately restrictive policy was sufficient because the underlying inflationary dynamic was different. The 9 percent inflation of 2022 was not the 1970s.
Metaculus forecasts a 74 percent probability that US headline CPI inflation will remain below 4 percent through 2028, consistent with the supply-shock interpretation of the 2021-23 episode. The forecast implies that the institutional conditions for persistent high inflation have not reasserted themselves.
Marcus Webb is a contributing writer at The Auguro covering fiscal policy, markets, and the political economy of American government.