[Global Finance] The Ukraine War and the 'New Era of Inflation'

Sharp Rise in Raw Material Prices Including Crude Oil and Food
100 Years of Inflation Since World War
Severe Mismatch Between Demand and Supply
1970s Shaken by Oil Shock

Baek Young-ran, CEO of History Journal

War breeds inflation. Since 1913, the U.S. Bureau of Statistics has recorded inflation, showing over a century of inflation history. The unfamiliar history of deflation also appears without fail.

Since the Ukraine war, prices of raw materials such as crude oil and food have been rising rapidly. The global economy is transitioning into a 'new era of inflation.' Before the world wars, most Americans were more concerned about deflation than inflation. In the early 1930s, record unemployment and economic recession led to decreased consumer demand and sharply falling prices. The U.S. experienced the largest deflation in history, known as the Great Depression. It was a painful era.

The world experienced the worst inflation in history due to World War I. Inflation exceeded 10% because of the war. Prices of food, clothing, and household goods more than doubled. Overall, prices surged by over 80%. The subsequent World War II was a total war, requiring an even greater amount of manpower and resources. By the late 1940s, after the war ended, the wartime boom ended and the economy fell into recession.

The fundamental cause of inflation is changes in supply and demand. War intensifies these changes. Especially large-scale wars divert the entire economy’s resources for military purposes. This causes shortages of some raw materials or products, inevitably raising prices of other goods. Federal Reserve Banks in each region sharply raised discount rates to curb runaway inflation. At that time, the Federal Reserve Board had not yet implemented a unified national monetary policy.

Because shortages can cause inflation, the Roosevelt administration controlled prices. Rationing was introduced for high-demand products. This strategy effectively suppressed inflation during the war but later became a cause of severe postwar inflation. Suppressed demand exploded into rampant inflation once the war ended. As rationing and price controls were lifted, a tsunami of pent-up consumer spending surged. Soldiers returned home, and Americans who had diligently purchased war bonds for years wanted to spend their savings. The number of people wanting to buy goods surged, but the economy inevitably experienced a lag in shifting from military goods back to consumer products.

Due to the mismatch of supply and demand after the war, inflation rose by more than 20% from March 1946 to March 1947. However, even higher prices could not curb strong consumer demand. From 1945 to 1949, American households purchased 20 million refrigerators and 21.4 million automobiles.

However, as the boom ended, the economy fell back into recession. Fortunately, the recession did not last long. The Korean War broke out in June 1950, and inflation reappeared in the news. The Korean War also triggered inflation. Consumers, vividly remembering food shortages and rationing from World War II, rushed to buy household goods and non-perishable foods. As a result, product prices rose more than 10% between 1950 and 1951. Under the newly established Office of Price Stabilization, the federal government reinstated price controls and rationing until the war ended in 1953. However, food shortages and rationing during the Korean War were not as severe as during World War II. After the Korean War, suppressed demand and runaway inflation were fortunately manageable.

In fact, from the mid-1950s to the late 1960s was one of the most peaceful periods on record, marked by strong consumer demand and economic prosperity. During that period, year-over-year inflation ranged between 1% and 3%. The 1950s were truly an era of prosperity and price stability. But it was a very brief spring. Economic history is inevitably a bumpy road full of problems.

Actually, from the mid-1950s to the late 1960s was one of the most peaceful inflation periods on record, combining strong consumer demand and economic prosperity. After the most intense post-World War II economic boom ended, the economy fell back into recession. Fortunately, it did not last long. The U.S. participated in the Korean War in June 1950, and inflation reappeared in the news. As a result, overall inflation soared to 6.8% between 1950 and 1951, with food prices rising 10%. Under the newly established Office of Price Stabilization, the federal government reinstated price controls and rationing until the war ended in 1953.

In the first half of the 20th century, war was the main driver of inflation, but in the latter half, oil prices became the issue. In the 1970s, the U.S. economy was shaken by two 'oil shocks.'

The first occurred in 1973 and 1974, when the Organization of Arab Petroleum Exporting Countries declared an oil embargo against the U.S. for supporting Israel. The second oil shock happened in 1979 due to the Iranian Revolution and the Iran-Iraq War, which halted oil production. As oil prices surged, prices of gasoline, heating, electricity, and even food soared.

During the first 'oil shock,' overall inflation rose about 10%, with energy and food prices also increasing about 10%. The second oil shock worsened the situation, with overall inflation peaking at 14.8% between March 1979 and March 1980?the highest since World War II.

Inflation was painfully high, and the economy in the late 1970s also fell into recession. This grim double burden was called 'stagflation.' It was truly the 'worst-case scenario' of 'high inflation, high unemployment, and low growth.'

In that context, key policy makers in the Ford administration were skeptical from the start. Alan Greenspan, who became Fed Chairman and was chairman of Ford’s Council of Economic Advisers, was appalled by the program. In his book The Age of Turbulence, Greenspan recalled attending a White House meeting on the matter: “Speechwriters ordered millions of 'Whip Inflation Now' buttons and handed out samples in the room. I was the only economist there, and I thought to myself, this is unbelievable foolishness. What am I doing here?” He thought, “You cannot ask small business owners to voluntarily give up price increases. They operate on thin margins and cannot stop suppliers from raising prices.”

Baek Young-ran, Editor-in-Chief of History Journal

This content was produced with the assistance of AI translation services.