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If you think inflation is wild now, look at how it has spiked over the past century

Whether it was pandemics or war, inflation has raised its ugly head several times over the past 100 years.

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Today's inflation news following a week of rapidly rising gas prices would understandably give U.S. consumers more to worry about. 

The consumer price index, the U.S. gauge of inflation, rose 7.9% in February from last year, the Bureau of Labor Statistics reported Thursday. That's another 40-year high for the index.

For most Americans, high inflation like what the nation experienced in the 1970s and early 1980s is at best a distant memory, but one that few are eager to revisit. 

Much of what sparked the current spike in prices can be linked to the uncertainties of the pandemic (more on that later), but like the last major spike, a quick run up in global oil prices could make this last longer than the Federal Reserve policy makers had hoped. 

What is the highest inflation rate in U.S. history?

The highest inflation recorded followed the last great pandemic, known as the Spanish flu, that killed 675,000 people in the U.S. between 1918 and 1919. The U.S. started tracking inflation in 1914.

The confluence of the Spanish flu and World War I combined to push inflation to the record level.

The federal government created and borrowed billions of dollars to pay for World War I – not unlike the trillions of dollars the federal government spent on COVID-19 relief. By June 1920, pent up consumer demand and relatively low interest rates helped drive inflation to an all-time high: an annual rate of 23.7%. 

The Federal Reserve quickly stepped on the economic brakes, helping to send the U.S. economy into a recession and ultimately a deflationary spiral – a situation economists say can be more vexing than inflation

Annual inflation rate history: World War II

Only two events in the past century have driven the national debt high enough to approach the annual gross domestic product of the country: World War II and COVID-19. Just as in World War I, the country relied on the Fed to keep interest rates low and let the money supply grow rapidly to finance the war.

Concerned about potentially slipping into another Great Depression after the war, Fed policymakers initially kept their easy-money policies in place. Americans went on a shopping spree with money they couldn't spend while the country was on its war footing. That led to a price spiral that topped out near 20%.  

The worst inflation in US history?

What was the worst inflationary period in the U.S. is up for debate, but the longest period not driven by a major war began in 1973 and didn't subside for a decade. 

Rising energy costs were central to igniting inflation in that era. 

The Arab oil embargo from 1973-1974 quadrupled energy prices and pummeled the U.S. economy. About five years later, the Iranian revolution drove oil prices higher again and sent prices at the pump past $1 for the first time in the U.S.

With inflation growing at a 15% annual rate in 1980, Paul Volker's Federal Reserve Board dramatically increased interest rates to 20%, which, in turn led to the steepest downturn at the time since the Great Depression.

How much gas prices have increased

Energy hadn't been as central to today's bout with inflation, but Russia's invasion of Ukraine has driven oil prices up more than 60% in just three months. That will likely add more inflationary pressure in coming weeks. This past week's price increases aren't reflected in this month's inflation report. 

The higher cost of oil has quickly rippled through to gas pumps around the country as President Joe Biden announced the U.S. will no longer import Russia's oil, coal or natural gas

Inflation at 40-year high 

Energy has been a key element in pushing prices higher, but it hasn't been the only one. It's informative to see how the pandemic has driven some of the biggest price increases in the U.S. in four decades. Here are a few parts of the economy that are emblematic of the price changes during the past two years. 

Charting U.S. inflation

What products rose the most in February

The BLS tracks a wide array of consumer products from month to month and year to year – everything from eggs to lumber to gasoline. The combined basket gives us a reading of how prices are changing in the economy. Here are some products that rose the most last month.

When will inflation slow?

In the longer term, inflation is as much about expectations as it is too much money chasing too few products.

Federal Reserve Board members have been watching and commenting on the rise in prices since the summer. The consensus initially among the policymakers was that inflation would moderate once the supply-chain issues caused by the pandemic were resolved.

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But those product shortages have combined with a worker shortage which has led to some of the largest wage increases in years. Higher worker costs could lead to even higher prices for products and services. Add in the current shock to energy prices because of Russia's invasion of Ukraine and all the elements are there for prices to continue climbing.

"We were anticipating that in some sense the high inflation readings were going to dissipate more quickly than they have, and they haven't," Robert Rich, senior economic and policy advisor at the Federal Reserve Bank of Cleveland, pointed out last month in an Ohio State University forum on inflation.  

"One of the key things that we'll be monitoring going forward is whether, in fact, long-term expectations will remain what they called 'well anchored' (or) relatively stable," Rich said.

Sources: Bureau of Labor Statistics, Federal Reserve Bank of Cleveland

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