inflation

US Inflation Rate by Year from 1929 to 2022

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How Bad Is Inflation? Past, Present, Future

 

The U.S. inflation rate by year is the percentage of change in product and service prices from one year to the next, or year-over-year.

  • The U.S. inflation rate by year is how much prices change year-over-year.
  • Year-over-year inflation rates give a clearer picture of price changes than annual average inflation.
  • The Federal Reserve uses monetary policy to achieve its target rate of 2% inflation.
  • Inflation has been stable over the last couple of years thanks to better policy decisions and managing inflation expectations.

Business Cycle: Expansion and Peak

The business cycle runs in four phases. The first phase is the expansion phase. This is when economic growth is positive, with a healthy 2% rate of inflation. The Federal Reserve considers this an acceptable rate of inflation.1

As the economy expands past a 3% rate of growth, it can create an asset bubble. That’s when the market value of an asset increases more rapidly than its underlying real value.
Economic Cycles
Business Cycle Phases. 

Business Cycle: Contraction and Trough

 

As the market resists any higher prices, a decline begins. This is the beginning of the third, or contraction, phase. The growth rate turns negative. If it lasts long enough, it can create a recession.

During recessions and troughs, the Federal Reserve (the Fed) uses monetary policy to control inflation, deflation, and disinflation.

The Effect of Monetary Policy

 

The Fed focuses on the Consumer Price Index for All Urban Consumers: Less Food and Energy.3 It excludes volatile gas and food prices. This measurement is more popularly known as the core inflation rate.

The Fed sets a target inflation rate of 2%. If the core rate rises much above that, the Fed will execute a contractionary monetary policy. It will increase the federal funds rate. This is the rate at which banks lend to each other overnight. Historically, this action reduces demand and forces prices lower.

The Fed can also lower the federal discount rate, which makes it cheaper to borrow money from the Fed itself. This is an attempt to increase demand and raise prices.

Other tools that the Fed uses are reserve requirements (increasing the amount held in reserves), open market operations (increasing transactions in U.S. securities), and reserve interest (paying interest in excess reserves to banks).4

 

U.S. Inflation Rate History and Forecast

The best way to compare inflation rates is to use the end-of-year CPI. This creates an image of a specific point in time.

The table below compares the inflation rate (December end-of-year) with the fed funds rate, the phase of the business cycle, and the significant events influencing inflation. A more detailed forecast is in the U.S. Economic Outlook.

Year Inflation Rate YOY Fed Funds Rate* Business Cycle (GDP Growth) Events Affecting Inflation
1929 0.60% NA August peak Market crash
1930 -6.40% NA Contraction (-8.5%) Smoot-Hawley
1931 -9.30% NA Contraction (-6.4%) Dust Bowl
1932 -10.30% NA Contraction (-12.9%) Hoover tax hikes
1933 0.80% NA Contraction ended in March (-1.2%) FDR’s New Deal
1934 1.50% NA Expansion (10.8%) U.S. debt rose
1935 3.00% NA Expansion (8.9%) Social Security
1936 1.40% NA Expansion (12.9%) FDR tax hikes
1937 2.90% NA Expansion peaked in May (5.1%) Depression resumes
1938 -2.80% NA Contraction ended in June (-3.3%) Depression ended
1939 0.00% NA Expansion (8.0% Dust Bowl ended
1940 0.70% NA Expansion (8.8%) Defense increased
1941 9.90% NA Expansion (17.7%) Pearl Harbor
1942 9.00% NA Expansion (18.9%) Defense spending
1943 3.00% NA Expansion (17.0%) Defense spending
1944 2.30% NA Expansion (8.0%) Bretton Woods
1945 2.20% NA Feb. peak, Oct. trough (-1.0%) Truman ended WWII
1946 18.10% NA Expansion (-11.6%) Budget cuts
1947 8.80% NA Expansion (-1.1%) Cold War spending
1948 3.00% NA Nov. peak (4.1%)
1949 -2.10% NA Oct trough (-0.6%) Fair Deal, NATO
1950 5.90% NA Expansion (8.7%) Korean War
1951 6.00% NA Expansion (8.0%)
1952 0.80% NA Expansion (4.1%)
1953 0.70% NA July peak (4.7%) Eisenhower ended Korean War
1954 -0.70% 1.25% May trough (-0.6%) Dow returned to 1929 high
1955 0.40% 2.50% Expansion (7.1%)
1956 3.00% 3.00% Expansion (2.1%)
1957 2.90% 3.00% Aug. peak (2.1%) Recession
1958 1.80% 2.50% April trough (-0.7%) Recession ended
1959 1.70% 4.00% Expansion (6.9%) Fed raised rates
1960 1.40% 2.00% April peak (2.6%) Recession
1961 0.70% 2.25% Feb. trough (2.6%) JFK’s deficit spending ended recession
1962 1.30% 3.00% Expansion (6.1%)
1963 1.60% 3.50% Expansion (4.4%)
1964 1.00% 3.75% Expansion (5.8%) LBJ Medicare, Medicaid
1965 1.90% 4.25% Expansion (6.5%)
1966 3.50% 5.50% Expansion (6.6%) Vietnam War
1967 3.00% 4.50% Expansion (2.7%)
1968 4.70% 6.00% Expansion (4.9%) Moon landing
1969 6.20% 9.00% Dec. peak (3.1%) Nixon took office
1970 5.60% 5.00% Nov. trough (0.2%) Recession
1971 3.30% 5.00% Expansion (3.3%) Wage-price controls
1972 3.40% 5.75% Expansion (5.3%) Stagflation
1973 8.70% 11.00% Nov. peak (5.6%) End of gold standard
1974 12.30% 8.00% Contraction (-0.5%) Watergate
1975 6.90% 6.50% March trough (-0.2%) Stop-gap monetary policy confused businesses and kept prices high
1976 4.90% 4.75% Expansion (5.4%)
1977 6.70% 6.50% Expansion (4.6%)
1978 9.00% 10.00% Expansion (5.5%)
1979 13.30% 12.00% Expansion (3.2%)
1980 12.50% 18.00% Jan. peak (-0.3%) Recession
1981 8.90% 12.00% July trough (2.5%) Reagan tax cut
1982 3.80% 8.50% November (-1.8%) Recession ended
1983 3.80% 9.25% Expansion (4.6%) Military spending
1984 3.90% 8.25% Expansion (7.2%
1985 3.80% 7.75% Expansion (4.2%)
1986 1.10% 6.00% Expansion (3.5%) Tax cut
1987 4.40% 6.75% Expansion (3.5%) Black Monday crash
1988 4.40% 9.75% Expansion (4.2%) Fed raised rates
1989 4.60% 8.25% Expansion (3.7%) S&L Crisis
1990 6.10% 7.00% July peak (1.9%) Recession
1991 3.10% 4.00% Mar trough (-0.1%) Fed lowered rates
1992 2.90% 3.00% Expansion (3.5%) NAFTA drafted
1993 2.70% 3.00% Expansion (2.8%) Balanced Budget Act
1994 2.70% 5.50% Expansion (4.0%)
1995 2.50% 5.50% Expansion (2.7%)
1996 3.30% 5.25% Expansion (3.8%) Welfare reform
1997 1.70% 5.50% Expansion (4.4%) Fed raised rates
1998 1.60% 4.75% Expansion (4.5%) LTCM crisis
1999 2.70% 5.50% Expansion (4.8%) Glass-Steagall repealed
2000 3.40% 6.50% Expansion (4.1%) Tech bubble burst
2001 1.60% 1.75% March peak, Nov. trough (1.0%) Bush tax cut, 9/11 attacks
2002 2.40% 1.25% Expansion (1.7%) War on Terror
2003 1.90% 1.00% Expansion (2.9%) JGTRRA
2004 3.30% 2.50% Expansion (3.8%)
2005 3.40% 4.25% Expansion (3.5%) Katrina, Bankruptcy Act
2006 2.50% 5.25% Expansion (2.9%) Bernanke became Fed Chair
2007 4.10% 4.25% Dec peak (1.9%) Bank crisis
2008 0.10% 0.25% Contraction (-0.1%) Financial crisis
2009 2.70% 0.25% June trough (-2.5%) ARRA
2010 1.50% 0.25% Expansion (2.6%) ACA, Dodd-Frank Act
2011 3.00% 0.25% Expansion (1.6%) Debt ceiling crisis
2012 1.70% 0.25% Expansion (2.2%)
2013 1.50% 0.25% Expansion (1.8%) Government shutdown. Sequestration
2014 0.80% 0.25% Expansion (2.5%) QE ends
2015 0.70% 0.25% Expansion (2.9%) Deflation in oil and gas prices
2016 2.10% 0.75% Expansion (1.6%)
2017 2.10% 1.50% Expansion (2.4%) Core inflation rate 1.7%
2018 1.90% 2.50% Expansion (2.9%) Core rate 2.2%
2019 2.30% 1.75% Expansion (2.2%) Core rate 2.3%
2020 0.80% 0.25% Contraction (-6.5%) Forecast: Core rate 1.0%
Impact of COVID 
2021 1.60% 2.00% Expansion (5.0%) Forecast: Core rate is 1.5%
2022 1.70% 2.00% Expansion Forecast: Core rate is 1.7%
-3.50%
*Top of the range for the targeted fed funds rate.

Why The Inflation Rate Matters

The inflation rate demonstrates the health of a country’s economy. It is a measurement tool used by a country’s central bank, economists, and government officials to gauge whether action is needed to keep an economy healthy. That’s when businesses are producing, consumers are spending, and supply and demand are as close to equilibrium as possible.

A healthy rate of inflation is good for both consumers and businesses. During deflation, consumers hold on to their cash because the goods will be cheaper tomorrow. Businesses lose money, cutting costs by reducing pay or employment. That happened during the subprime housing crisis.

In galloping inflation, consumers spend now before prices rise tomorrow. That artificially increases demand. Businesses raise prices because they can, as inflation spirals out of control.

When inflation is steady, at around 2%, the economy is more or less as stable as it can get. Consumers are buying what businesses are selling.

Resources for Table

  • Historical Inflation Rate, Bureau of Labor Statistics.5 Year-over-year rate.
  • Historical Targeted Fed Funds Rate.
  • Historical Fed Funds Rate, Federal Reserve Bank of New York.6 Used to estimate targeted fed funds rate before 1971.
  • Historical Fed Funds Rate, Federal Reserve Bank of New York.7 Used to estimate targeted fed funds rate 1971-1989.
  • Open Market Operations Archive, Federal Reserve Board.8 Targeted Fed Funds Rate 1990-2002.
  • Open Market Operations, Federal Reserve Board.9 Targeted Fed Funds Rate 2003-2022.
  • Recession History
  • History of Gold Standard
  • Business Cycle Dates, NBER10
  • National Income, and Product Accounts Tables: Table 1.1.1. GDP Growth Rate, BEA.11
  • Forecast for GDP and Inflation12
Source: The Balance

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