III.

History

Examples of inflation and deflation have occurred throughout history, but detailed records are not available to measure trends before the Middle Ages. Economic historians have identified the 16th to early 17th centuries in Europe as a period of long-term inflation, although the average annual rate of 1 to 2 percent was modest by modern standards. Major changes occurred during the American Revolution, when prices in the U.S. rose an average of 8.5 percent per month, and during the French Revolution, when prices in France rose at a rate of 10 percent per month. These relatively brief flurries were followed by long periods of alternating international inflations and deflations linked to specific political and economic events.

The U.S. reported average annual price changes as follows: 1790 to 1815, up 3.3 percent; 1815 to 1850, down 2.3 percent; 1850 to 1873, up 5.3 percent; 1873 to 1896, down 1.8 percent; 1896 to 1920, up 4.2 percent; and 1920 to 1934, down 3.9 percent. This extended history indicates a recurring sequence of inflations, linked to wartime periods, followed by long periods of price stability or deflation. Consumer prices accelerated during the World War II era, rising at an annual average rate of 7.0 percent from 1940 to 1948, and then stabilized from 1948 to 1965, when the annual increases averaged only 1.6 percent, including a peak of 5.9 percent in 1951 during the Korean War.

In the mid-1960s a chronic inflationary trend began in most industrial nations. From 1965 to 1978 American consumer prices increased at an average annual rate of 5.7 percent, including a peak of 12.2 percent in 1974. This ominous shift was followed by consumer price gains of 13.3 percent in 1979 and 12.4 percent in 1980. Several other industrial nations suffered a similar acceleration of price increases, but some countries, such as West Germany (now part of the united Federal Republic of Germany), avoided chronic inflation. Given the integrated status of most nations in the world economy, these disparate results reflected the relative effectiveness of national economic policies.

This unfavorable inflationary trend was reversed in most industrial nations during the mid-1980s. Austere government fiscal and monetary policies begun in the early part of the decade combined with sharp declines in world oil and commodity prices to return the average inflation rate to about 4 percent.