Inflation in the 1970s
How the Great Inflation of 1965 to 1982 built up, from a mistaken belief that more inflation could buy lower unemployment to the end of the gold link and two oil shocks, what it did to stocks, bonds, and cash, and how Paul Volcker's Federal Reserve ended it at the cost of a deep recession.
The short version
US inflation rose from about 1% in the mid-1960s to 14.8% in March 1980. Policymakers believed a little more inflation could buy lower unemployment; the dollar's last link to gold ended in 1971; and oil prices quadrupled in 1973 and tripled again in 1979. Once people came to expect inflation, it fed on itself, and the country got high inflation and high unemployment together. From 1966 to 1981, stocks lost about 1% a year after inflation and 10-year Treasury bonds about 3% a year, taking about 40% of bondholders' buying power. Paul Volcker's Fed broke it with interest rates near 20%, at the cost of unemployment near 11%.
By the end of this lesson, you'll be able to
- Explain the causes of the Great Inflation: policy beliefs, the end of Bretton Woods, fiscal strains, oil shocks, and expectations
- Describe what high inflation did to the real returns of stocks, bonds, and cash
- Explain how the Volcker Fed ended it, what it cost, and what changed afterward
Why this matters
The Great Inflation, lasting from 1965 to 1982, was the defining macroeconomic event of the second half of the twentieth century. Over those years the postwar global monetary system was abandoned, there were four recessions, two severe energy shortages, and peacetime wage and price controls.1 It was the worst stretch in modern US history for bondholders, and it's the reason central banks now treat stable inflation as a commitment rather than a preference.
How it built up
In 1964, inflation was a little over 1% a year. It began ratcheting up in the mid-1960s, and the Fed's historians describe its source plainly: policies that allowed excessive growth in the supply of money.1 Several forces pushed in that direction.
- A mistaken trade-off. Policymakers widely believed that permanently lower unemployment could be bought with modestly higher inflation. The economists Edmund Phelps and Milton Friedman warned that people would learn to expect inflation, so the bargain would need ever higher inflation to maintain.1
- No anchor. The Bretton Woods system tied currencies to the dollar and the dollar to gold. In the summer of 1971, President Nixon stopped the exchange of dollars for gold by foreign central banks, and by 1973 the system was finished, leaving most of the world's money unanchored.1
- Fiscal strain. Great Society programs and the Vietnam War stretched the federal budget, and the Fed avoided changing policy around Treasury borrowing.1
- Oil shocks. The Arab oil embargo from October 1973 quadrupled crude prices, and the Iranian revolution in 1979 tripled them again. The Fed leaned against the resulting unemployment, which added to the inflation.1
- Bad data. Real-time estimates overstated how much the economy could produce, so policymakers underestimated the inflation their policies would cause.1
As households and businesses came to anticipate rising prices, the trade-off disappeared, and the country got both high inflation and high unemployment: stagflation. In 1964 inflation was 1% and unemployment 5%. Ten years later, inflation was over 12% and unemployment above 7%.1 Wage and price controls between 1971 and 1974 only temporarily slowed prices while making shortages worse.1
| Measure | Peak | When |
|---|---|---|
| Consumer prices, change over 12 months | 14.8% | March 1980 |
| Federal funds rate, monthly average | 19.1% | June 1981 |
| 10-year Treasury yield, monthly average | 15.3% | September 1981 |
Bureau of Labor Statistics and Federal Reserve figures.23
The rest of this lesson is for members
Still to come in this lesson: What it did to investments, The cure, the key takeaways, and 2 quiz questions with explanations.
Membership opens every lesson in the curriculum, the capstone projects, the interactive tools, and the members-only channels in the Hyperion Entities Discord. The first lesson of every module stays free.
Go deeper
- What Drives InflationEconomics for Investors (depth track)
- Inflation and Purchasing PowerPart 1: Foundations
- Real Yields and Breakeven InflationFixed Income in Depth (depth track)
- Central Banks and Monetary PolicyPart 6: Strategy, Behavior, Accounts, and Taxes
Notes and sources
- Federal Reserve History. Michael Bryan, The Great Inflation: 1965-1982. Checked 2026-10-17. Back to text
- Federal Reserve Bank of St. Louis (FRED), from the U.S. Bureau of Labor Statistics. Consumer Price Index for All Urban Consumers: All Items in U.S. City Average, not seasonally adjusted (CPIAUCNS), monthly since 1913. Checked 2026-11-02. Back to text
- Federal Reserve Bank of St. Louis (FRED), from the Board of Governors of the Federal Reserve System. Federal Funds Effective Rate (FEDFUNDS) and 10-Year Treasury Constant Maturity Rate (GS10), monthly averages. Checked 2026-10-17. Back to text
- Aswath Damodaran, NYU Stern School of Business. Historical Returns on Stocks, Bonds and Bills, with annual data through 2025 (updated January 2026). Checked 2026-11-02.
- Federal Reserve History. Tim Sablik, Recession of 1981-82. Checked 2026-10-17.