In October 1973, Arab members of OPEC imposed an oil embargo against the United States in retaliation for American support of Israel during the Yom Kippur War. The price of oil quadrupled from roughly $3 per barrel to $12 within months. That single event did not cause the inflation of the 1970s by itself — the groundwork had been laid by years of monetary missteps and political pressure on the Federal Reserve — but it triggered the most visible and painful episode of peacetime inflation in modern American history. By 1974, annual CPI inflation hit 11.0%. By 1979, it would reach 13.3%. The decade permanently reshaped how central banks think about their independence, their credibility, and their mandate.
The story of 1970s inflation is not merely historical curiosity. It is the benchmark against which every subsequent inflation episode has been measured. When inflation spiked to 9.1% in June 2022, economists and policymakers immediately invoked the 1970s as both a cautionary example and a guide for what to do — and more importantly, what not to do — to bring prices back under control.
The Numbers: A Decade That Doubled Prices
The Bureau of Labor Statistics CPI-U data tells the quantitative story cleanly. At the start of 1970, the CPI-U stood at 38.8. By December 1980, it had reached 86.3 — and the annual average for 1980 was 82.4. That is a cumulative price increase of 112% over the decade: prices more than doubled in ten years.
| Year | CPI-U | Annual Inflation |
|---|---|---|
| 1970 | 38.8 | 5.8% |
| 1971 | 40.5 | 4.3% |
| 1972 | 41.8 | 3.3% |
| 1973 | 44.4 | 6.2% |
| 1974 | 49.3 | 11.0% |
| 1975 | 53.8 | 9.1% |
| 1976 | 56.9 | 5.8% |
| 1977 | 60.6 | 6.5% |
| 1978 | 65.2 | 7.6% |
| 1979 | 72.6 | 11.3% |
| 1980 | 82.4 | 13.5% |
Even the relatively calm years of 1971–1972 — when Nixon's price controls temporarily suppressed measured inflation — were running at 3–4%, well above the Federal Reserve's modern 2% target. The decade had no year of "normal" inflation by contemporary standards.
Three Causes Working Simultaneously
The 1970s inflation crisis was not a single-cause event. Three distinct forces were operating at the same time, and their interaction made the problem far more severe than any one of them would have caused alone.
1. The breakdown of Bretton Woods and loose monetary policy. In August 1971, President Nixon closed the "gold window" — ending the convertibility of dollars into gold at $35 per ounce. This unilateral act ended the Bretton Woods international monetary system and formally untethered the dollar from any commodity anchor. The Federal Reserve, under Chairman Arthur Burns, then pursued an overly accommodative monetary policy through the mid-1970s — keeping interest rates below the rate of inflation and allowing the money supply to expand rapidly. Burns faced intense political pressure from the Nixon administration, which wanted low rates to support the economy ahead of the 1972 election. Academic consensus today holds that the Fed's failure to maintain credible inflation control in the early 1970s was the primary structural cause of the decade's price instability.
2. The oil shocks. The October 1973 OPEC embargo and the subsequent fourfold increase in oil prices hit every sector of the economy simultaneously. Because oil is an input to transportation, manufacturing, agriculture, and heating, its price feeds into nearly everything else. The 1974 inflation peak of 11.0% was directly traceable to energy costs cascading through the price system. A second oil shock followed in 1979 when the Iranian Revolution disrupted global oil supply, sending prices from roughly $13 per barrel to over $35 per barrel by 1980. This is what drove the 13.5% annual inflation reading in 1980 — the highest of the entire decade.
3. The wage-price spiral. As prices rose, workers demanded — and in a strong labor market, often received — higher wages to maintain their purchasing power. Higher wages raised production costs, which businesses passed on through higher prices, which led to demands for even higher wages. This self-reinforcing dynamic, called the wage-price spiral, is particularly difficult to break because it becomes embedded in contracts, expectations, and collective bargaining agreements. By the late 1970s, inflation expectations themselves were elevated: workers and businesses assumed prices would keep rising, so they negotiated accordingly, making the assumption self-fulfilling.
Nixon's Wage and Price Controls: The Policy That Failed
Faced with rising inflation, President Nixon imposed mandatory wage and price controls in August 1971 — the first peacetime controls in American history. The initial "freeze" lasted 90 days, succeeded by a series of increasingly permissive control programs (Phase II, Phase III, Phase IV) that stretched into 1974. The controls temporarily suppressed measured CPI but did not address the underlying causes. When they were lifted, pent-up price pressure erupted rapidly — contributing to the 1974 spike. The experience of the 1970s has made economists broadly skeptical of price controls as an inflation-fighting tool: they distort supply signals, create shortages, and merely delay rather than eliminate price increases.
How Paul Volcker Broke the Inflation
President Carter appointed Paul Volcker as Federal Reserve Chairman in August 1979. Volcker understood that breaking entrenched inflation required breaking inflation expectations, and that required pain. In October 1979, the Fed shifted to targeting the money supply rather than interest rates — a policy change that allowed rates to rise as high as the market required to slow money growth. The federal funds rate peaked at 20.06% in June 1981. Mortgage rates reached 18.5%. The economy fell into a severe recession in 1980, recovered briefly, then fell into an even deeper recession in 1981–1982. Unemployment peaked at 10.8% in December 1982 — the highest since the Great Depression.
Annual CPI inflation:
1979: 11.3% → 1980: 13.5% → 1981: 10.3% → 1982: 6.2% → 1983: 3.2% → 1984: 4.3%
Fed funds rate peak: 20.06% (June 1981)
Cost: Two recessions, unemployment peaking at 10.8% (December 1982)
The lesson Volcker demonstrated was that central bank credibility is the cornerstone of price stability. Once people believe a central bank will do whatever it takes to control inflation — even at enormous short-term economic cost — they stop building high inflation into contracts and wages, and the self-fulfilling spiral stops. Volcker's willingness to accept two recessions restored that credibility, which held for the following three decades of low and stable inflation known as the Great Moderation.
How the 1970s Affected Average Families
For a household earning the median income of roughly $17,000 in 1975, 11% annual inflation meant their grocery bill, utility costs, and rent were consuming a rising share of every paycheck. Families on fixed incomes — retirees with pensions denominated in nominal dollars — saw the real value of their payments erode rapidly. A pension of $10,000 per year in 1970 had the purchasing power of only $5,500 by 1980. Mortgage rates for new buyers surged to unaffordable levels; by 1981, the average 30-year fixed mortgage rate hit 18.6%, effectively locking first-time buyers out of the market. The misery was not evenly distributed: workers with strong unions and cost-of-living adjustment (COLA) clauses in their contracts fared better; retirees and savers without inflation protection fared far worse.
Lessons Applicable to 2021–2022 and Beyond
When CPI inflation peaked at 9.1% in June 2022, the parallels to the 1970s were clear — and deliberate. The Federal Reserve, under Chair Jerome Powell, explicitly studied the 1970s experience and drew three specific lessons. First, do not take inflation lightly in its early stages: Burns's mistake was treating early inflation as transitory when it was becoming entrenched. Second, act decisively once committed to tightening: Volcker's success came from credible, sustained action. Third, communicate clearly: modern central banking relies heavily on forward guidance to shape expectations, which Burns largely neglected.
The Fed's 2022–2023 rate hike cycle — raising the federal funds rate from near zero to over 5.25% in roughly 16 months — was the fastest hiking cycle since Volcker. And the outcome, so far, resembles the "soft landing" scenario: inflation came down from 9.1% to below 3% without a severe recession, though the debate about why (better supply-side dynamics than the 1970s? More credible central bank?) continues among economists. The one thing the 2021–2022 episode confirmed is that the 1970s playbook remains the essential reference point for understanding what high inflation looks like and how to escape it.
To see exactly how the cumulative price increases from the 1970s and beyond affect any specific dollar amount, use our Inflation Calculator with BLS CPI data going back to 1913. For deeper context on how inflation is measured and what the CPI captures, see What Is Inflation and How CPI Is Calculated.