The Great Inflation

What Is The Great Inflation?

The Great Inflation is the name given to the prolonged period of high inflation that gripped the United States from the mid-1960s through the early 1980s, with year-over-year inflation peaking at roughly 13-14% at its worst. The era was marked by stagflation - high inflation alongside high unemployment - driven by factors including oil shocks and monetary policy widely judged in hindsight to have been too slow to respond. Arthur Burns chaired the Fed during much of the 1970s, a tenure later criticized for that slow response, before Paul Volcker took the helm and moved aggressively to break inflation with sharply higher interest rates.

Why It Matters

The Great Inflation is arguably the defining formative experience of the modern Federal Reserve. Volcker's determination to break it - raising rates high enough to trigger a deep recession in the early 1980s - established the principle that a central bank must be willing to accept short-term economic pain to restore price stability. The episode also reshaped the Fed's mandate and priorities, cementing a lasting institutional commitment to keeping inflation low and expectations anchored. Later decisions, including the formal adoption of a 2% inflation target in 2012 and the forceful response to the 2021-2022 surge, reflect lessons learned from a generation of policymakers determined never to let inflation become entrenched again.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• Which Fed Chair presided over the Fed during the "Great Inflation" of the 1970s, a period later criticized for policy that was too slow to respond?
  Arthur Burns
• Roughly how high did U.S. inflation reach during the peak of the "Great Inflation" of the 1970s-early 1980s?
  Around 13-14% year-over-year