ADVERTISEMENT
Friday, February 3, 2023
  • Home
  • About Us
  • Contact Us
  • Disclaimer
  • Privacy Policy
  • Terms & Conditions
Involve Africa
  • Home
  • All African News
  • Politics
  • Technology
  • Entertainment News
    • Travel
    • Tourism
    • Arts
  • Finance
    • Food & Agriculture
    • Business & Economy
  • Crypto News
  • Energy & Environment
No Result
View All Result
  • Home
  • All African News
  • Politics
  • Technology
  • Entertainment News
    • Travel
    • Tourism
    • Arts
  • Finance
    • Food & Agriculture
    • Business & Economy
  • Crypto News
  • Energy & Environment
No Result
View All Result
Involve Africa
No Result
View All Result
ADVERTISEMENT
Home Finance

EconExtra: Is Comparing Inflation in 1981 to Today Meaningful?

Involve Africa by Involve Africa
July 31, 2022
in Finance
0
EconExtra: Is Comparing Inflation in 1981 to Today Meaningful?
585
SHARES
3.2k
VIEWS
https://web.facebook.com/involveafricanews?_rdc=1&https://twitter.com/involveafricanews


The Federal Open Market Committee voted to raise interest rates by 75 basis points this week in its efforts to tame inflation in the US. (CNBC) The US hasn’t experienced inflation over 4% since around 1990, and current headlines always mention that we haven’t seen inflation this high since 1981. But is this comparison helpful?

Inflation in 1981 versus Now

We keep hearing that inflation is at levels not seen for 40 years. People are concerned about inflation, worried about increasing interest rates, and bets are now favoring a recession at some point in the not too distant future, especially after the second quarter GDP showed a 0.9% decline (CNBC). For anyone born since 1980, you haven’t experienced anything like this. And for many GenXers, the high inflation days were in their childhood before they may have been very aware of the economy.  Below find a graph of Core PCE since 1960–the measure used most often by the Fed as a truer measure of underlying inflation.

Differences outnumber similarities between the two time periods in question. We can start with what was similar. Both periods were marked by an energy crisis. And folks were griping then as now about the Fed increasing interest rates. But even the headline inflation rates reaching levels not seen in 40 years needs to be put in context. The inflation rate for the decade up to 1981 AVERAGED 9%, compared to about 2% for the most recent decade. Interest rates were not being increased from zero but from something closer to the rate of inflation. Interest rates today are still well below the inflation rate we are currently experiencing. And mortgage rates exceeded 17% in late 1981—while mortgage rates today are just under 6%.

Of course, the flip side of the interest rate/inflation rate relationship then to now is that risk-free investments (Treasury bills and bonds) earned 400 basis points more than inflation in 1981, but today (except for I-bonds) they pay about 600 basis points less than the inflation rate.

For more comparisons, including a great collection of charts of all this data, check out A Wealth of Common Sense “The Last Time Inflation Was This High.”

 

The Fed Then versus Now

We have already discussed that high inflation was not a new phenomenon in 1981. But a key economic indicator—the unemployment rate–was much different in 1981. It was over 7%, about double the current unemployment rate. The economy was generally much weaker in 1981 compared to now. Paul Volcker, the Chairman of the Federal Reserve in the 80’s, aggressively raised interest rates to tame inflation. It took awhile, and the US suffered through two recessions in the process.  

While the US is in a much stronger position as the Fed’s begins its fight against inflation with these current rate increases, the likelihood of a severe recession is less than it was forty years ago, but not out of the question. Taking a closer look at the Fed’s actions and economy’s responses in the 80’s might give us some insight into assessing the likelihood of a recession today.

Events of the 60s and 70s (The War on Poverty, the Vietnam War, the Yom Kippur war and resultant energy crisis, Nixon’s Wage and Price Controls, and the end of convertibility of dollars to gold) set the stage for the economy that Volcker inherited when he took over as Chairman in January, 1979.

This is how Vox explains the repercussions of the interest rate increases under Volcker.

That month (October, 1979), the Fed’s interest rate was set at 13.7 percent; by April, it had spiked a full 4 points to 17.6 percent. It would near 20 percent at times in 1981. Higher interest rates generally reduce inflation by reducing spending, which in turn slows the economy and can lead to mass unemployment. When the Fed raises interest rates, rates on everything from credit card debt to mortgages to business loans go up. When it’s more expensive to take out a business loan, businesses contract and hire less; when mortgages are pricier, people buy fewer homes; when credit card rates are higher, people spend and charge less. The result is less spending, and thus less inflation, but also slower growth.

Those early rate increases were enough to drive the economy into a recession by January of 1980, and thus the Fed backed off and lowered them. Then inflation roared back, and interest rates had to be increased again, leading to a more severe recession. By the time Volcker’s term ended in 1989, inflation was down to 3.4%, but there had been widespread pain felt across the economy.

The Fed’s recent interest rate moves have been fairly dramatic (75 basis points at the last two FOMC meetings), and the Fed is trying very hard for a “soft landing.” If you listen carefully to Jerome Powell’s post announcement press conference, he explained that some weakening of demand and softening of the labor market might be what is needed to tame the beast we call inflation.

 

Lesson Idea

Have students read both the Vox and Wealth of Common Sense articles and address the following:

  • Looking through both articles, find five economic indicators and compare 1981 to 2022. How would you describe the relative strength of the economy then versus now? Which data comparison surprised you the most?
  • Trace the impact of the increases in the Federal Funds rate on individuals, businesses, and ultimately, the economy.
  • Do you feel we are headed for a recession? Why or why not?  Did examining the experience of the early 1980’s influence your opinion?

For a more detailed activity on the most recent FOMC, try NGPF’s More Interest Rate Increases: Federal Reserve July Press Conference Activity.

 



Source_link

You might also like

Should You Stop Your Spouse from Giving Parents Allowance

Deliver I Bonds Bought as a Gift in TreasuryDirect

All PLAY and MOVE activities revamped!

Previous Post

Nigeria: Aribo Scores Incredible Goal for Southampton

Next Post

Gold Coast abolitionist who exposed Britain’s anti-slavery hypocrisy

Involve Africa

Involve Africa

Related Posts

Should You Stop Your Spouse from Giving Parents Allowance
Finance

Should You Stop Your Spouse from Giving Parents Allowance

by Involve Africa
February 3, 2023
Deliver I Bonds Bought as a Gift in TreasuryDirect
Finance

Deliver I Bonds Bought as a Gift in TreasuryDirect

by Involve Africa
February 2, 2023
All PLAY and MOVE activities revamped!
Finance

All PLAY and MOVE activities revamped!

by Involve Africa
February 2, 2023
Traditional Backdoor Roth & Mega Backdoor Roth
Finance

Traditional Backdoor Roth & Mega Backdoor Roth

by Involve Africa
February 2, 2023
The 8 Best Guaranteed Interest Investment Accounts
Finance

The 8 Best Guaranteed Interest Investment Accounts

by Involve Africa
February 2, 2023
Next Post
Gold Coast abolitionist who exposed Britain’s anti-slavery hypocrisy

Gold Coast abolitionist who exposed Britain's anti-slavery hypocrisy

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Recommended

FAO honors Kuwait for meeting MDGs

FAO honors Kuwait for meeting MDGs

September 22, 2022
Tech lay-offs are the latest blow to office landlords

Tech lay-offs are the latest blow to office landlords

December 18, 2022

Categories

  • All African News
  • Arts
  • Business & Economy
  • Crypto News
  • Energy & Environment
  • Entertainment News
  • Finance
  • Food & Agriculture
  • News Videos
  • Politics
  • Technology
  • Tourism
  • Travel

Don't miss it

Nigeria: 2023 – Why Peter Obi Cannot Win Presidential Election – El-Rufai
Politics

Nigeria: 2023 – Why Peter Obi Cannot Win Presidential Election – El-Rufai

February 3, 2023
Thesis Announces Acquisition and Growth Investment by SilverTree Equity
Food & Agriculture

Thesis Announces Acquisition and Growth Investment by SilverTree Equity

February 3, 2023
Should You Stop Your Spouse from Giving Parents Allowance
Finance

Should You Stop Your Spouse from Giving Parents Allowance

February 3, 2023
Inflows into Crypto Products Highest since FTX Collapse
Crypto News

Inflows into Crypto Products Highest since FTX Collapse

February 3, 2023
WIN! #Grounded with Greenpop
Tourism

WIN! #Grounded with Greenpop

February 3, 2023
The Ultimate Route 66 Road Trip Guide
Travel

The Ultimate Route 66 Road Trip Guide

February 3, 2023

Social Bar

Welcome to involve Africa The goal of involve Africa is to give you the absolute best news sources for any topic! Our topics are carefully curated and constantly updated as we know the web moves fast so we try to as well.

Categories

  • All African News
  • Arts
  • Business & Economy
  • Crypto News
  • Energy & Environment
  • Entertainment News
  • Finance
  • Food & Agriculture
  • News Videos
  • Politics
  • Technology
  • Tourism
  • Travel

Site Links

  • Home
  • About Us
  • Contact Us
  • Disclaimer
  • Privacy Policy
  • Terms & Conditions

Recent News

Nigeria: 2023 – Why Peter Obi Cannot Win Presidential Election – El-Rufai

Nigeria: 2023 – Why Peter Obi Cannot Win Presidential Election – El-Rufai

February 3, 2023
Thesis Announces Acquisition and Growth Investment by SilverTree Equity

Thesis Announces Acquisition and Growth Investment by SilverTree Equity

February 3, 2023

INVOLVEAFRICA.COM

No Result
View All Result
  • Home
  • All African News
  • Politics
  • Technology
  • Entertainment News
    • Travel
    • Tourism
    • Arts
  • Finance
    • Food & Agriculture
    • Business & Economy
  • Crypto News
  • Energy & Environment

INVOLVEAFRICA.COM

What Are Cookies
We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept All”, you consent to the use of ALL the cookies. However, you may visit "Cookie Settings" to provide a controlled consent.
Cookie SettingsAccept All
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
CookieDurationDescription
cookielawinfo-checkbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytics
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
Others
Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
SAVE & ACCEPT