Understanding 70's Price Inflation

Economics Economics Questions
1

I’m trying to understand why the 70’s were different from the 80’s, 90’s, and current decade, especially in regards to consumer price inflation.

  1. Why did interest rates shoot up in the early 80’s, if monetary policy did not change? The increases to the monetary base in the 80’s look identical to the late and early 70’s. Will a Fed Funds target rate change actually effect real interest rates if the underlying monetary expansion does not change? Or did other things change?

  2. How do we measure savings and savings rates? It seems all capital investment would be deferred consumption, although I would not expect these to show up in savings numbers. Shouldn’t lower savings rates in the face of monetary expansion contribute to consumer price inflation? Or is this the other way around - the more people save, the more “reserves” the banks have to issue credit against? The 70’s appeared to have high personal savings rates and even higher total private savings relative to the 60’s, 80’s, 90’s, and current decade.

  3. I understand futures contracts and other financial instruments can expand the perceived supply of goods to be greater than the actual amount of goods, which can keep price inflation lower for the underlying real goods. If such instruments proved they were incapable of delivering real goods, this should increase price inflation. However, could it instead cause people to hold cash rather than invest in such instruments?

  4. Can our increasing reliance on imported goods disconnect inflation with price inflation, being that the dollar is the world reserve currency? Or would increased global trade simply reduce prices by increasing division of labor and productivity, while printing dollars drove prices up?

It seems to me that in money and credit stats, that the 70’s stand out for 2 reasons. One, all monetary aggregates showed increasing long-term growth rates throughout the 70’s. I assume people may have believed that in just a few years, these rates would reach > 20% if nothing policy-wise changed. This led to a general unwillingness to hold dollars. And two, credit growth soared alongside money growth. I figure a lot of this was malinvestment.

2

On #1, can you elaborate? I’m quite sure there was a contraction in the money supply in the 1980’s due to new policy, which tamed price inflation.

3

I’m pretty sure at the beginning of the 80s the Fed went heavy deflationary. Volcker wanted to try shock tactics to rid the economy of inflation, and increased the Federal funds rate enormously. I think the Federal funds rate does influence the interest rates alot more. I’m not entirely positive if the money supply increases were the same throughout the 70s and all the 80s.

4

M1, MZM, M2, M0

They seem to decline, but not really by that much. M2 shows the most decline. This is out of the FED’s hands.