The first inflation problem of the twenty-first century

Abstract

Inflation in the US after World War II peaked at 19.7 per cent in the 12 months to March 1947. The US economy reoriented itself from its wartime to its post-war structural configuration. The Federal Reserve did nothing at all. Inflation went negative in 1949 at the onset of a minor recession. Inflation revived in 1951, and was in some ways a reverse of 1947 – not a demobilization but a remobilization inflation. Again, the Federal Reserve did nothing. And, again, the inflation wave passed. Then came the long siege of moderate inflation that took place between 1966 and 1980, as the Federal Reserve dithered before the Volcker disinflation. What policy you think would have been and will be appropriate for the Biden Administration and the Yellen–Powell Fed depends on which of these past historical episodes provides the best model and analogy for the state of the US economy today. The odds right now seem to me to be on the first two, rather than the third.