US Inflation from 1968 to 1985

What Drove Inflation from 1968 to 1985

Great Society & Vietnam: President Johnson's Great Society programs and escalating Vietnam War spending drove federal deficits higher without compensating tax increases. The Federal Reserve, under political pressure to keep rates low, accommodated this fiscal expansion. Inflation, which had been below 2% in the early 1960s, climbed steadily past 5% by 1969. Nixon imposed wage and price controls in 1971, temporarily suppressing inflation while setting the stage for a more severe outbreak.

Stagflation: The 1973 Arab oil embargo sent oil prices quadrupling almost overnight, triggering a global recession and double-digit US inflation simultaneously. A second oil price shock in 1979–80 doubled energy costs again. The toxic combination of high inflation and high unemployment — stagflation — exposed the limits of traditional demand management. Paul Volcker's appointment as Federal Reserve chairman in 1979 marked the turning point, as aggressive rate hikes eventually broke the inflationary spiral.

Disinflation: Volcker's medicine worked, but at a steep price: the 1981–82 recession was the deepest since the Depression, with unemployment exceeding 10%. Inflation fell rapidly from above 13% to below 4% by 1983. The subsequent expansion was long and vigorous, supported by falling oil prices, deregulation, and tax cuts. The Federal Reserve established credibility as an inflation fighter, anchoring expectations and keeping prices relatively stable through the rest of the decade.

Understanding the Numbers

Over these 17 years, prices roughly tripled — a total inflation rate of +209.2%. The annualized rate of +6.87% per year was well above the historical average of roughly 3.3% per year.

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