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When Inflation was Over 10%
Feb. 18th, 2022 05:12 pmYesterday I shared a graphic I adapted from CNN.com showing the US inflation rate over the last 65 years. I remarked that there were a lot of narratives I could relate about what that chart represents. That's a hallmark of great charts, BTW: they convey a lot of possible stories at the same time.
One thing that happens with a chart like this is your eye being drawn to the places where the graph is the highest— those two peaks in 1973 and 1980. It's that highest peak, around 1980 when inflation hit 15% annually, that I want to write a bit about today.
I was a child at the time but I do remember that era. I was getting old enough to learn things about money, prices, etc., particularly because I was precocious and way ahead of my age group in math. I remember seeing prices rising noticeably year-over-year. Things like the Sears catalog made it easy to compare; I could have both the current catalog and last year's open at the same time, and point right to how much prices had gone up.
Inflation is a huge threat to savings. When the inflation rate is, say, 15% (like it was that one year) if you're not earning 15% on your savings, you're losing money. And most people weren't earning 15%. Middle class Americans back then kept their savings, if they had any, in ordinary bank accounts. Interest rates paid on savings were several points below the inflation rate. Getting paid 8% interest may have seemed like great money— it made unwise savers feel they were getting rich— but when prices were increasing 10%, 12%, 15% annually the value of their savings was being eroded.
For people who owe money, on the other hand, inflation can be helpful. My parents owned a house with a mortgage. The rate was fixed at 8%. With everything else growing at 10% a year the relative price of that mortgage got smaller and smaller.
New home loans had rates of 18+%. It was a good time to own a house and not need to move. ...My parents were looking to move, BTW. They needed a bigger house for their growing family. But the cost of borrowing new money at 18% or higher made it unaffordable.
My parents owed money on credit cards, too. For a while inflation helped shrink the relative size of their old debt. But then the credit card issuers convinced the government to remove limits on interest rates. In particular the state of South Dakota removed its usury laws in 1981, and several major credit card issuing banks moved there (article in The Atlantic, 10 Jul 2013). Other states followed suit. Within a few years credit card interest rates shot up from an average of about 12% to almost 20%.
BTW, you notice how even today most credit cards have standard rates of 18% or higher even over the past 30 years when inflation has often averaged just 2-3%? Thank the "freedom" granted by states removing laws against usury and abusive lending in the 1980s.
One thing that happens with a chart like this is your eye being drawn to the places where the graph is the highest— those two peaks in 1973 and 1980. It's that highest peak, around 1980 when inflation hit 15% annually, that I want to write a bit about today.
I was a child at the time but I do remember that era. I was getting old enough to learn things about money, prices, etc., particularly because I was precocious and way ahead of my age group in math. I remember seeing prices rising noticeably year-over-year. Things like the Sears catalog made it easy to compare; I could have both the current catalog and last year's open at the same time, and point right to how much prices had gone up.
Who Inflation's Good For
One thing I also remember about that time was that my parents weren't too bothered about inflation. Years later I recognized that was because they were debtors.Inflation is a huge threat to savings. When the inflation rate is, say, 15% (like it was that one year) if you're not earning 15% on your savings, you're losing money. And most people weren't earning 15%. Middle class Americans back then kept their savings, if they had any, in ordinary bank accounts. Interest rates paid on savings were several points below the inflation rate. Getting paid 8% interest may have seemed like great money— it made unwise savers feel they were getting rich— but when prices were increasing 10%, 12%, 15% annually the value of their savings was being eroded.
For people who owe money, on the other hand, inflation can be helpful. My parents owned a house with a mortgage. The rate was fixed at 8%. With everything else growing at 10% a year the relative price of that mortgage got smaller and smaller.
New home loans had rates of 18+%. It was a good time to own a house and not need to move. ...My parents were looking to move, BTW. They needed a bigger house for their growing family. But the cost of borrowing new money at 18% or higher made it unaffordable.
My parents owed money on credit cards, too. For a while inflation helped shrink the relative size of their old debt. But then the credit card issuers convinced the government to remove limits on interest rates. In particular the state of South Dakota removed its usury laws in 1981, and several major credit card issuing banks moved there (article in The Atlantic, 10 Jul 2013). Other states followed suit. Within a few years credit card interest rates shot up from an average of about 12% to almost 20%.
BTW, you notice how even today most credit cards have standard rates of 18% or higher even over the past 30 years when inflation has often averaged just 2-3%? Thank the "freedom" granted by states removing laws against usury and abusive lending in the 1980s.
