Finding The Echoes Of 1948’s Inflation In Today’s Inflation The Federal Reserve on the Sidelines of Late 1940s Inflation Inflation Today

20c Harry S. Truman single | National Postal MuseumIn “Want to Understand 2024? Look at 1948“, the New York Times drew some fascinating parallels between today’s economic and political climate and the era leading to Harry Truman’s surprise victory over Thomas Dewey in the 1948 Presidential election. One key quote summarized the context: “in the era of modern economic data, Harry Truman was the only president besides Joe Biden to oversee an economy with inflation more than 7% while unemployment stayed under 4% and GDP growth kept climbing.” I took particular interest in the references to the inflationary dynamics from around 76 years ago.Inflation landed around 20% in 1947, according to the NY Times, which also claimed it was the worst inflation America experienced over the past 100 years. The article did not specify the inflation measure, so for the purposes of discussion I assume the article referred to the entire Consumer Price Index (CPI). If so, then the 20% figure must have been for a particular month in 1947. The annual inflation for 1947 was 8.8% according to Investopedia, far short of the highest level over the past 100 years. Inflation the year before soared to 18.1% from 1945’s 2.2%. While it looks like the NYT selectively picked an inflation number for effect, it is clear that sentiment on inflation during this time was as dour as one should expect during a period of exceptionally high inflation. The following bullets are mostly direct quotes from the article reordered chronologically:

  • In December 1947, more than 70% of adults said they would want their own wages to decline in order to bring prices down.
  • In polling throughout 1947 and 1948, a majority supported reinstating wartime rationing and price controls.
  • Before the conventions, voters said a plan to address high prices was the No. 1 priority they wanted in a party platform. More voters said they wanted prices to be addressed over the next four years than any other issue.
  • In June, 1948, a majority of voters expected prices would be higher in six months (at election time in November, only 18% of voters expected the same).
  • As late as summer 1948…adults expected prices to keep rising.
  • A combination of economic pressures sent inflation soaring.Post-war supply shortages combined with the end of price controls to light a fire under inflation. The NY Times article pointed out that labor unrest following World War 2 exacerbated supply shortages. For example, the National WWII Museum in New Orleans observes: “With the end of the wartime no-strike pledge, workers across America expressed their frustration with wages and working conditions through a series of strikes that involved over 5 million people from the end of 1945 and into 1946.” Strikes hit broad swaths of the economy: mills, telephone service, meat packing, and General Electric (a major industrial employer at the time). The railroad strike of 1946 crippled large parts of the economy (the interstate highway system did not start until Eisenhower’s presidency in the 1950s). No doubt all this economic disruption helped dampen the national mood alongside the resulting price pressures.Layer on pent-up consumer demand and the economy got hit with a perfect inflationary storm. Benefits from the GI Bill, not mentioned in the NY Times article, helped to stoke consumer demand. For example, while the country built very little housing during World War II, the GI Bill offered returning soldiers low interest, zero down payment home loans with better terms for newly built housing. Although Black servicemen were often denied benefits of the GI Bill (and thus they were often left in poverty), such incentives must have contributed to increased pricing pressures in the economy.The NY Times article also did not consider the potential price distortion from large amounts of U.S. resources funneled into the Marshall Plan. The Marshall Plan kicked off in 1948, and it is plausible suppliers felt emboldened to increase prices in anticipation of the largess. Supply responses in Europe would eventually erode this pricing power.Fast forward to today and we find parallel economic distortions putting pressure on prices. Massive fiscal and monetary stimulus stoked demand, especially for housing and related goods. Government supported pandemic savings have apparently supported on-going strength in retail spending. Wage growth has also supported robust consumer demand. While today’s labor unrest pales in comparison to post-war labor actions, the scales have tipped in favor of labor for now. Unemployment remains at historic lows, and employers have readily absorbed the rebound in the labor force participation rate. U.S. industrial policy could apply its own upward pressures on prices in the economy.The Federal Reserve on the Sidelines of Late 1940s InflationThe volatile cocktail of inflationary pressures must have complicated monetary policy. Compared to today’s tornadic monetary policy response, the Fed’s rate hikes in the immediate post-war years look exceptionally timid. The Federal Reserve essentially sat on the sidelines as the economy convulsed through its inflationary pressures. From “A New Daily Federal Funds Rate Series and History of the Federal Funds Market, 1928-1954“:Today’s deflationists would have been particularly happy with the timid Fed of the late 1940s and early 1950s! Fresh memories of the economic devastation of the Depression no doubt also slowed the hand of the Fed. The NY Times article did not delve into the role of the Fed in allowing inflation to take its course in the post war years.Inflation TodayPandemic disruptions are mostly in repair, but Russia’s invasion of Ukraine has caused its own supply disruptions. The Israel-Hamas war threatens to cause disruptions in global oil markets and shipping lanes in the Gulf. Growing tensions between China and Taiwan and increasing authoritarian control over the Chinese economy have motivated companies to leave China in search of “safer” countries for production. This transition will likely pressures prices through increased production costs and the short-term transition costs.In other words, while financial markets celebrate the end of the Federal Reserve’s fight against inflation, there are plenty of looming inflation risks, any of which could deliver setbacks to current trends. Seventy-six years ago inflation came to a boil and then yielded through the 1950s and early 1960s. A parallel peak for today’s inflationary era would be welcome news.More By This Author:The Fed Makes It Official: Inflation Is Dead
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