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This is what was happening 40 years ago, the last time inflation was this high

KELSEY SNELL, HOST:

So what was happening 40 years ago, the last time inflation was as high as it is now? For that, we're hopping in the wayback machine with NPR chief economic correspondent Scott Horsley. Hi, Scott.

SCOTT HORSLEY, BYLINE: (Laughter) Great to be with you, Kelsey.

SNELL: So, Scott, the last time inflation was this high, Ronald Reagan was in the White House, Olivia Newton-John was all over the radio, and the cool new computer was the Commodore 64, named for its 64 kilobytes of memory. Oh, and there was a new soft drink about to hit the shelves.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED PERSON: (Singing) Introducing Diet Coke. You're going to drink it just for the taste of it.

SNELL: Yes, there was a time before Diet Coke. And that seems like a very long time ago, but, Scott, how close are we to living through all that all over again?

HORSLEY: Kelsey, what you have to keep in mind is that in 1982, inflation was actually coming down. It had been much higher, almost twice as high in 1980, when annual inflation peaked at 14.6%...

SNELL: Oh, wow.

HORSLEY: ...Almost twice as high as it is right now. And back then, inflation had been high for the better part of a decade. Richard Nixon, Gerald Ford, Jimmy Carter had all been dogged by high inflation. And by the time Reagan came into office, Americans had kind of gotten numb to prices that just kept going up and up.

(SOUNDBITE OF ARCHIVED RECORDING)

RONALD REAGAN: Now, we've just had two years of back-to-back double-digit inflation - 13.3% in 1979, 12.4% last year. The last time this happened was in World War I.

HORSLEY: So by the standards of the '70s and early '80s, today's inflation rate actually doesn't look that bad.

SNELL: So it was coming down. How did policymakers get control of inflation back then?

HORSLEY: Well, it was pretty painful medicine delivered by the Federal Reserve. Paul Volcker, who was appointed Fed chairman by then President Carter, was determined to break the back of inflation, and he was willing to push interest rates sky high to do it. To give you an example, in 1981, mortgage rates soared to 18%. As you can imagine, that was pretty unpopular. Angry homebuilders scrawled protest notes to Volcker on the backs of wooden planks. But the Fed chairman stuck to his guns. Here's Volcker speaking to "The MacNeil/Lehrer NewsHour."

(SOUNDBITE OF TV SHOW, "THE MACNEIL/LEHRER NEWSHOUR")

PAUL VOLCKER: At some point, this dam is going to break, and the psychology is going to change.

HORSLEY: Now, some people might think we're looking at a repeat of that when they hear the Fed is again preparing to raise interest rates to rein in inflation.

SNELL: Right.

HORSLEY: But the rate hikes we're talking about now are nothing like the draconian measures that Volcker pursued. Remember; interest rates have been near-zero throughout the pandemic. So even if Fed were to raise rates seven times this year to 2% or something, as some forecasters now expect, credit would still be really cheap by historical standards. The easy money party has been going on for a long time now, and the Fed is not talking about taking away the punchbowl, just replacing some of the really sugary punch with something closer to Diet Coke.

SNELL: (Laughter) OK, so there are obviously some pretty big differences between today's inflation and what the U.S. went through in 1982. But are there still lessons from that era that we can learn?

HORSLEY: One lesson is that inflation is still painful. Rising prices really weigh on people's attitudes about the economy, and politicians ignore that at their peril. Some of the big drivers of inflation last month were the rising price of rent and electricity and groceries - you know, things most of us can't do without. At a supermarket outside of Washington, Abdul Ture says his money just doesn't go as far as it used to, and he has to make smaller, more frequent grocery shopping trips.

ABDUL TURE: Oh, no, the prices go up. Everything's gone up inside. Now I usually buy, like, a just couple things I can use for two or three days. Before, I could buy for one week. But now, no.

HORSLEY: Now, that affects people's attitudes. You know, forecasters do expect price hikes to ease over the course of the year, but inflation has already proven higher and more persistent than a lot of experts expected.

SNELL: A lot of things, though, have changed in the last 40 years. Take my cell phone, for instance. It has 100,000 times the memory of that old Commodore computer we were talking about. Does that mean inflation is less of a threat than it used to be?

HORSLEY: You know, for most of the last few decades, it did seem as if the inflation dragon had been slain. It was thought that in a global economy, for example, workers would have less bargaining power to command higher wages. Oil shocks don't rattle the economy the way they did in the 1970s because the economy is not as dependent on oil as it used to be. But during the pandemic, we have experienced other kinds of supply shocks. And when you couple shortages of computer chips and truck drivers and workers of all kinds with really strong demand, well, that's a recipe for rising prices.

SNELL: You know, during the pandemic, both Congress and the Federal Reserve pumped trillions of dollars into the economy. It was an effort to kind of cushion the fallout. So how much did that contribute to the inflation that we're experiencing now?

HORSLEY: That's something economists are going to be arguing about for a while. Those trillions of dollars did help to fuel a really rapid recovery. Unemployment came down from nearly 15% early in the pandemic to 4% now. Could we have gotten that rapid recovery without the side effect of high inflation? Jason Furman, who was an economic adviser in the Obama administration, thinks that last $1.9 trillion Congress put out last spring did go too far, even if it helped to speed the recovery and put more people back to work.

JASON FURMAN: I would rather have low unemployment and high inflation than the opposite. I think there were probably things that were better than either of those. I think if the recovery plan had been half as large, we'd have almost the same number of jobs now and a lot less inflation. But who knows?

HORSLEY: Fed Chairman Jerome Powell was also asked if the Fed went too far. He says it's going to be up to historians years from now to decide on the wisdom of the central bank's policies. His cigar-chomping predecessor, Paul Volcker, looks a lot better in hindsight. If Powell comes to his next news conference with a cigar, look out.

SNELL: That is NPR chief economic correspondent Scott Horsley. Thanks, Scott, for jumping in the wayback machine with us and giving us this kind of look back at the way things might be going.

HORSLEY: You're welcome.

(SOUNDBITE OF SONG, "PHYSICAL")

OLIVIA NEWTON-JOHN: (Singing) Let's get physical, physical. I want to get physical. Let's get into physical. Let me hear your body talk, body talk. Transcript provided by NPR, Copyright NPR.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.