Back to the Future with the Highest Inflation in Four Decades

January 12, 2022

Key Takeaways:

  • Inflation for 2021 was 7.0 percent year-over-year, the highest reading since 1982, and the worst deterioration over the prior year since 1950-51.
  • The average working American was hit with an $855 inflation tax hike last year, with low-income families and fixed-income seniors suffering the most—violating the Biden Administration’s pledge not to raise taxes on anybody making under $400,000.
  • After denying, distracting, and deflecting blame for high inflation, the Biden Administration’s recent policy prescriptions are even more disconnected from reality. Antitrust enforcement would do nothing to improve inflation, and the policies in the Build Back Better Bill—known also as the Big Government Socialism Bill—would add to inflationary pressures by further crimping supply.

Tax Day is still a few months away, but thanks to a 7.0 percent inflation rate in 2021—the worst since 1982—the average American worker has already been hit with an $855 inflation tax over the last 12 months, with low-wage families and seniors on fixed incomes the most vulnerable to this stealth tax increase. By comparison, inflation was just 1.2 percent in 2020 and averaged 1.9 percent from 2017-20, which is right in line with the Federal Reserve’s target for price stability. To add to the concern, this consumer price report comes on the heels of the latest producer price data released in December that showed nearly double-digit producer price inflation—a bad omen for what consumers could face in the coming months if small businesses pass on these higher costs.

In less than a year, the Biden Administration has managed to default on its promise to insulate Americans earning under $400,000 from tax increases while simultaneously setting decades-high inflation records not seen in more than a generation. Viewed in proper historical context, the comparison with 1982 inflation actually understates the severity of the current situation. After all, inflation in 1982 was rapidly falling from its 1980 peak of 13.5 percent as the federal government abandoned the failed policies that led to the late-1970s stagflation. By contrast, the inflation surge of 2021 follows a low 1.2 percent inflation rate in 2020. In fact, this abrupt increase in annual inflation rates marks the worst deterioration since the Korean War years of 1950-51. Figure 1 provides a striking visual aid of this rapid emergence of inflation.

After watching their paychecks shrink by 2.3 percent (see figure 2) in real terms throughout 2021, the big question that hangs over Americans is this: how much longer can this go on? Unfortunately, the Biden Administration’s statements and policy moves leave little reason for optimism. Over the past year, its public comments have gone from outright denial to distraction to deflection. First, the Biden Administration cast Larry Summers—a former Clinton Administration Treasury Secretary and Obama Administration Director of the National Economic Council—out into the cold after he proclaimed that “…this is the least responsible macroeconomic policy we’ve had in the last forty years” while warning of the serious risks of inflation. Then, through spring and summer 2021, when inflation readings began rolling in at troublesomely high levels, the Biden Administration ramped up the public relations distraction effort by reiterating the mantra that inflation was just “transitory” and confined to only certain goods, like used cars. The Bureau of Labor Statistics subsequently put this narrative to bed by pointing out the broad-based nature of price increases in 2021. Lately, in the face of unrelenting inflation, the Biden Administration has begun deflecting blame to the private sector by ascribing inflation to “corporate greed”—as if the desire of businesses to turn a profit only emerged in 2021.

No longer able to deny the bite inflation is taking out of the paychecks of working families and the fixed incomes of America’s seniors, the Biden Administration is charting an even more perilous path by putting forward counterproductive policy prescriptions like antitrust crackdowns. More troubling are the ongoing efforts to double down on the failed economics of 2021 by promising more of the same reckless fiscal policy—on steroids—in the Build Back Better Bill, also known as the Big Government Socialism Bill. One thing is clear: turning the screws even more on supply by hiking taxes, permanently enshrining work disincentives, and burdening small businesses with an array of new mandates would add to, not subtract from, inflationary pressures—provided families can even find the goods on store shelves in the face of exacerbated supply shortages.