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What Was the Great Inflation?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 18 September 2016
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The great inflation was a period of global economic distress in the 1970s characterized by very high inflation rates, as well as high unemployment — a situation dubbed “stagflation.” Economic policies have been blamed for allowing the great inflation to grow as large as it did, and this period in history has been closely analyzed to provide lessons for avoiding future episodes of this nature. One remarkable feature of the great inflation was a violation of the generally accepted idea at the time that it was impossible for high unemployment and inflation rates to be yoked together, a concept promoted by Keynesian theory, a popular approach to economics.

A number of factors combined to create the great inflation. One was a loose monetary policy in the wake of the Second World War designed to promote employment and economic growth. Interest rates were kept low and the money supply was kept high. This contributed to the development of inflation, as readily available credit and money tend to drive prices up. Many governments became concerned about high unemployment and choose to continue keeping interest rates low in the hopes of improving the employment situation, making the inflation worse.

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The 1970s was also marked by an energy crisis. Prices for gasoline rose at the pump and created a ripple effect as production of goods and services became more expensive, leading to rising costs for many consumer goods. In addition, agricultural insecurity could be seen during the great inflation. These factors combined to make prices for many necessary goods more expensive, increasing inflation at a time when many people were unemployed and could not afford to buy the things they needed.

The stock market lost significant value during the great inflation, and this contributed to more economic uncertainty, undermining confidence among investors and putting further stress on the economy. Many nations experienced economic hardship during this period until shifts in economic policy were made, pushing interest rates up and the money supply down to bring prices to a more manageable level. Other measures and controls were used as nations attempted to get their inflation rates under control.

While this period officially lasted from around 1973 to 1975, many nations experienced problems for up to 20 years after the great inflation. Economic bubbles like the explosive real estate market in Japan and the growth of the technology industry in the United States further complicated recovery from the great inflation as nations rebounded.

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