ECONOMY

US Inflation rate by year from 1929 to 2023

The U.S. Inflation Rate by Year is the change in prices of products and services from one year to another, or ” .”

Each phase of the business cycles affects the inflation rate. The cycle is the rise and fall in economic growth over time. The cycle is based on the highs (and lows) of the Gross Domestic Product, which measures the total goods and services produced by a country.

The Key Takeaways

  • The U.S. Inflation Rate by Year reflects the amount of price change from year to year.
  • The annual average of inflation is not as clear-cut as the inflation rate from year to year.
  • The Federal Reserve uses monetary policies to achieve its target of 2% inflation.
  • In 2022, the COVID-19 pandemic will cause inflation to reach 8.5%. This is the highest level since 1982.

Business Cycle: Expansion & Peak

The business cycle is divided into four phases. The first phase of the business cycle is expansion. The expansion phase is characterized by positive economic growth and a healthy inflation rate of 2%. 1 The Fed announced on August 27, 2020 that it will allow an inflation rate higher than 2% as long as that helps ensure maximum employment. The Fed still aims for a 2% inflation rate over time, but will allow higher rates in the event that inflation has been low. 2

When the economy grows beyond a rate of 3%, it can cause a asset boom. When the market value of a particular asset rises faster than its real value.

The second phase is called the peak.” The contraction phase begins when the expansion phase ends.

Business Cycle: Trough and Contraction

A decline occurs when the market is unable to accept any price increases. The third phase, contraction begins. The growth rate becomes negative. It can lead to a recession if it continues for a long time.

Deflation is possible during a recession. This is a drop in the price of goods and service. This can be even more dangerous than inflation.

The economy continues to decline and reaches its lowest possible level. The fourth phase is when the contraction stops and the economic expansion starts. Inflation rates begin to rise again and the cycle continues.

The Fed controls inflation, deflation and disinflation by using monetary policy during recessions and troughs.

 

The Impact of Monetary Policy

The Fed is focused on the core rate which excludes food and gas prices. These volatile prices fluctuate from month-to-month, masking inflation trends.

The Fed has set a target rate of inflation at 2%. The Fed will implement a contractionary policy if the core rate is much higher than that. The Fed can lower the federal discount rates, making it cheaper to borrow from the Fed. This is an effort to raise demand and prices.

The Fed also uses:

  • Reserve requirements (the amount of reserves banks must hold)
  • Open Market Operations (buying and selling U.S. Securities from member banks).
  • Reserve interest (paying Interest on Excess Reserves) 

 

U.S. Inflation History and Forecast

It is best to use the end-of-year consumer price index to compare inflation. This creates a snapshot of a particular point in time.

In the table below, we compare the December end-of-year inflation rate with the Fed Funds rate, the phase in the business cycle and the major events that influence inflation. The U.S. Economic Outlook provides a more detailed forecast. Economic Outlook.

YEAR INFLATION RATE YOY4

 

FED FUNDS RATE*5 BUSINESS CYCLE (GDP GROWTH)67 EVENTS AFFECTING INFLATION8
1929 0.6% NA August peak Market crash
1930 -6.4% NA Contraction (-8.5%) Smoot-Hawley
1931 -9.3% NA Contraction (-6.4%) Dust Bowl
1932 -10.3% NA Contraction (-12.9%) Hoover tax hikes
1933 0.8% NA Contraction ended in March (-1.2%) FDR’s New Deal
1934 1.5% NA Expansion (10.8%) U.S. debt rose
1935 3.0% NA Expansion (8.9%) Social Security
1936 1.4% NA Expansion (12.9%) FDR tax hikes
1937 2.9% NA Expansion peaked in May (5.1%) Depression resumes
1938 -2.8% NA Contraction ended in June (-3.3%) Depression ended
1939 0.0% NA Expansion (8.0% Dust Bowl ended
1940 0.7% NA Expansion (8.8%) Defense increased
1941 9.9% NA Expansion (17.7%) Pearl Harbor
1942 9.0% NA Expansion (18.9%) Defense spending
1943 3.0% NA Expansion (17.0%) Defense spending
1944 2.3% NA Expansion (8.0%) Bretton Woods
1945 2.2% NA Feb. peak, Oct. trough (-1.0%) Truman ended WWII
1946 18.1% NA Expansion (-11.6%) Budget cuts
1947 8.8% NA Expansion (-1.1%) Cold War spending
1948 3.0% NA Nov. peak (4.1%)
1949 -2.1% NA Oct trough (-0.6%) Fair Deal, NATO
1950 5.9% NA Expansion (8.7%) Korean War
1951 6.0% NA Expansion (8.0%)
1952 0.8% NA Expansion (4.1%)
1953 0.7% NA July peak (4.7%) Eisenhower ended Korean War
1954 -0.7% 1.25% May trough (-0.6%) Dow returned to 1929 high
1955 0.4% 2.50% Expansion (7.1%)
1956 3.0% 3.00% Expansion (2.1%)
1957 2.9% 3.00% Aug. peak (2.1%) Recession
1958 1.8% 2.50% April trough (-0.7%) Recession ended
1959 1.7% 4.00% Expansion (6.9%) Fed raised rates
1960 1.4% 2.00% April peak (2.6%) Recession
1961 0.7% 2.25% Feb. trough (2.6%) JFK’s deficit spending ended recession
1962 1.3% 3.00% Expansion (6.1%)
1963 1.6% 3.5% Expansion (4.4%)
1964 1.0% 3.75% Expansion (5.8%) LBJ Medicare, Medicaid
1965 1.9% 4.25% Expansion (6.5%)
1966 3.5% 5.50% Expansion (6.6%) Vietnam War
1967 3.0% 4.50% Expansion (2.7%)
1968 4.7% 6.00% Expansion (4.9%) Moon landing
1969 6.2% 9.00% Dec. peak (3.1%) Nixon took office
1970 5.6% 5.00% Nov. trough (0.2%) Recession
1971 3.3% 5.00% Expansion (3.3%) Wage-price controls
1972 3.4% 5.75% Expansion (5.3%) Stagflation
1973 8.7% 9.00% Nov. peak (5.6%) End of gold standard
1974 12.3% 8.00% Contraction (-0.5%) Watergate
1975 6.9% 4.75% March trough (-0.2%) Stop-gap monetary policy confused businesses and kept prices high
1976 4.9% 4.75% Expansion (5.4%)
1977 6.7% 6.50% Expansion (4.6%)
1978 9.0% 10.00% Expansion (5.5%)
1979 13.3% 12.00% Expansion (3.2%)
1980 12.5% 18.00% Jan. peak (-0.3%) Recession
1981 8.9% 12.00% July trough (2.5%) Reagan tax cut
1982 3.8% 8.50% November (-1.8%) Recession ended
1983 3.8% 9.25% Expansion (4.6%) Military spending
1984 3.9% 8.25% Expansion (7.2%)
1985 3.8% 7.75% Expansion (4.2%)
1986 1.1% 6.00% Expansion (3.5%) Tax cut
1987 4.4% 6.75% Expansion (3.5%) Black Monday crash
1988 4.4% 9.75% Expansion (4.2%) Fed raised rates
1989 4.6% 8.25% Expansion (3.7%) S&L Crisis
1990 6.1% 7.00% July peak (1.9%) Recession
1991 3.1% 4.00% Mar trough (-0.1%) Fed lowered rates
1992 2.9% 3.00% Expansion (3.5%) NAFTA drafted
1993 2.7% 3.00% Expansion (2.8%) Balanced Budget Act
1994 2.7% 5.50% Expansion (4.0%)
1995 2.5% 5.50% Expansion (2.7%)
1996 3.3% 5.25% Expansion (3.8%) Welfare reform
1997 1.7% 5.50% Expansion (4.4%) Fed raised rates
1998 1.6% 4.75% Expansion (4.5%) LTCM crisis
1999 2.7% 5.50% Expansion (4.8%) Glass-Steagall repealed
2000 3.4% 6.50% Expansion (4.1%) Tech bubble burst
2001 1.6% 1.75% March peak, Nov. trough (1.0%) Bush tax cut, 9/11 attacks
2002 2.4% 1.25% Expansion (1.7%) War on Terror
2003 1.9% 1.00% Expansion (2.9%) JGTRRA
2004 3.3% 2.25% Expansion (3.8%)
2005 3.4% 4.25% Expansion (3.5%) Katrina, Bankruptcy Act
2006 2.5% 5.25% Expansion (2.9%)
2007 4.1% 4.25% Dec peak (1.9%) Bank crisis
2008 0.1% 0.25% Contraction (-0.1%) Financial crisis
2009 2.7% 0.25% June trough (-2.5%) ARRA
2010 1.5% 0.25% Expansion (2.6%) ACA, Dodd-Frank Act
2011 3.0% 0.25% Expansion (1.6%) Debt ceiling crisis
2012 1.7% 0.25% Expansion (2.2%)
2013 1.5% 0.25% Expansion (1.8%) Government shutdown. Sequestration
2014 0.8% 0.25% Expansion (2.5%) QE ends
2015 0.7% 0.50% Expansion (3.1%) Deflation in oil and gas prices
2016 2.1% 0.75% Expansion (1.7%)
2017 2.1% 1.50% Expansion (2.3%)
2018 1.9% 2.50% Expansion (3.0%)
2019 2.3% 1.75% Expansion (2.2%)
2020 1.4% 0.25% Contraction (-3.4%) COVID-19
2021 7.0% 0.25% Expansion (5.9%) COVID-19
2022 6.5% 4.25% Contraction (-1.6%)
2023 2.7% (est.) 2.8% (est.) Expansion (2.2%) March 2022 projection
2024 2.3% (est.) 2.8% (est.) Expansion (2.0%) March 2022 projection

*Top of the range for the targeted fed funds rate.

Why Inflation Rates Matter

Inflation rates are a good indicator of the economy’s health. The inflation rate is used by the central bank of a country, economists and government officials as a tool to determine if action is required to maintain a healthy economy. This is when consumers spend, businesses produce, and supply and demands are at their closest equilibrium.

Both consumers and businesses benefit from a healthy inflation rate. In deflation, the consumer holds on to his cash in anticipation of cheaper goods tomorrow. Businesses cut costs and lose money by reducing wages or staff. This happened during the subprime mortgage crisis.

Consumers spend now to avoid future price increases. This artificially increases the demand. As inflation spirals out-of-control, businesses raise prices to make money.

The economy is stable when inflation is constant, around 2%. The consumers are buying the products that businesses sell.

 

FAQs (Frequently Asked Questions)

How is inflation calculated?

There are many ways to calculate inflation. However, the U.S. Bureau of Labor Statistics relies on the consumer price index. CPI uses price data from 80,000 consumer products and 23,000 businesses to calculate how much the prices have changed over a period of time. The inflation rate will be 3% if the CPI increases by 3% over a year. On the other hand the Fed relies on a price index that measures personal expenditures. This index gives greater weight to healthcare costs.

 

What is the highest rate of inflation in U.S. History?

The highest annual rate of inflation in the U.S. since the CPI was introduced in 1913 was 17.8%. The 1970s were the most sustained period of high inflation rates. 

 

How can you protect yourself from inflation?

Hedging against inflation is essential to any successful investing strategy, as it causes money value to decrease over time. To offset inflation, investors use a diverse portfolio that includes a range of asset classes.

the authorAaron Krause

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