The annual inflation rate — 8.6% for the 12 months ending May 2022 — represents the largest annual increase since December 1981.
Former Federal Reserve Chair Ben Bernanke (2006-2014) wrote an opinion piece published in The New York Times saying that, despite current high inflation, the situation in the U.S. is different from America's great inflation of the 1960s and 1970s.
From 1966 through 1981, "the Consumer Price Index rose, on average, by more than 7 percent per year, peaking at over 13 percent in 1980. This period also saw two major and two minor recessions and an approximately two-thirds decline in the Dow Jones industrial average, when adjusted for inflation," Bernanke writes.
Bernanke observes that while the current economic situation has some similarities to the past, such as heavy federal spending and shocks on global energy and food prices, there are key differences as well.
"The Fed today has the independence it needs to make policy decisions based solely on the economic data and in the longer-run interests of the economy, not on short-term political considerations," Bernanke writes.
Current Fed Chair Jerome Powell has support from both the White House and Congress to lower inflation, Bernanke writes.
By contrast, in the 1960s and 1970s, "any inclination by the Federal Reserve to fight inflation by raising interest rates, which could also slow the economy and raise unemployment, met stiff political resistance," Bernanke writes in The New York Times. Former President Lyndon Johnson, "attempting to insulate the public from the economic costs of an unpopular war, put intense pressure on the Fed chairman, William McChesney Martin, to keep interest rates low."
And former President Richard Nixon, who wanted to be re-elected in 1972, "made it clear to Mr. Martin’s successor at the Fed, Arthur Burns, that he would not tolerate an economic slowdown before the election, and Mr. Burns took no significant action against inflation."
Fed Chair Powell last year called inflation "transitory" and has been criticized for being too slow to raise interest rates and end bond-buying. Nonetheless, he was reappointed by President Joe Biden for another term as chair of the Federal Reserve.
"After a delay caused by a misdiagnosis of the economy in 2021, the Fed has accordingly turned to tightening monetary policy, ending its pandemic-era bond purchases, announcing plans to shrink its securities holdings and raising short-term interest rates," Bernanke writes.
Powell's job will not be easy, according to Bernanke. "The degree to which the central bank will have to tighten monetary policy to control our currently high inflation, and the associated risk of an economic slowdown or recession, depends on several factors: how quickly the supply-side problems (high oil prices, supply-chain snarls) subside, how aggregate spending reacts to the tighter financial conditions engineered by the Fed and whether the Fed retains its credibility as an inflation fighter even if inflation takes a while to subside."
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