How Past Crises Have Impacted Inflation

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If you’ve tuned into the business news lately, you know that inflation has been a hot topic. But why does it seem like some people are nervous about it? Inflation means prices are rising, and if that happens too quickly, it could be a sign the economy is expanding too rapidly. Practically speaking, none of us want to pay higher prices, but inflation isn’t always bad. Some inflation is good and even normal for the overall economy. (Want to know more about inflation? We’ve got an explainer here.)

Inflation – no surprise – is hardly new, so let’s turn to history to help put all of the chatter in context. The economists at Goldman Sachs examined how past events, like wars or pandemics, have played a role in inflation and price increases. We'll review some of their findings and look at what lessons history might teach us about inflation's future path. 

The relationship between past pandemics and inflation

Historically speaking, pandemics haven’t been an inflation trigger. When Goldman Sachs’ economists analyzed 12 major pandemics all the way back to the Black Death in the 1300s, they found that these health crises didn’t result in higher inflation. Rather: “Inflation has typically remained weak during pandemics and declined in their aftermath.”


Inflation has typically risen sharply both during – and in the aftermath – of 12 major wars 


After each pandemic, they found that the rate of inflation fluctuated close to zero for nine years after the pandemic ended. (For context, the rate of inflation in the U.S. has ranged from 0.9% to 2.1% since 2008.) So, what do these past health crises mean for the COVID pandemic? We’ll explain that shortly! 

Reaching your goal starts with saving for it.

Reaching your goals starts with saving for it.

Major wars tend to hike up inflation 

The battle against the Covid-19 pandemic is obviously much different than a war. But in economic terms, it’s often been compared to one. The economists looked back on 12 major wars since the early 1600s to see how they moved inflation. What they found: “Inflation has typically risen sharply both during and – especially – in the aftermath of major wars, with median inflation peaking at 8% one year after the war has ended.”

The relationship between higher inflation and wars can be explained by two reasons. First, wars drive up total demand for goods and services. And because wars often see destruction of physical capital, that increases demand for investment, thereby pushing interest rates higher. Just look to the 20th century for examples: Inflation spiked after World Wars I and II, reaching annual rates of nearly 20%.

The Fed’s role during the high inflation of the 1960s and 1970s

The economists also looked back on other periods of high inflation, beyond times of war. It turns out that well-intentioned Federal Reserve policymakers could also contribute to surging prices, as happened with double-digit inflation in the 1970s. 

What went wrong? Stick with us for a brief history refresher. Basically, 1970s inflation can be boiled down to three problems that began in the 1960s. First, Federal Reserve policymakers were operating with a flawed framework because they misunderstood inflation dynamics and thought higher inflation was temporary.

Second, these same policymakers didn’t want to increase interest rates to help tame inflation. And finally, the Fed faced heavy political pressure, including from White House officials and members of Congress, to leave interest rates alone (which contributed to higher inflation).


Goldman Sachs economists expect inflation to remain “fairly tame” ahead 


And that brings us back to today. As the Goldman Sachs economists note, there are some parallels between the 1970s and what’s happening now. Back then, the surge in inflation followed a lengthy period in which inflation and inflation expectations were stable, which is “somewhat unsettling.” There’s also a similar policy approach now as there was then, which is focused on expanding the economy. 

But there’ve also been some major changes in the past 50+ years. Here are three that the economists pointed out: 

  • Today, our expectations about inflation are more firmly anchored to what the Fed is targeting
  • Policymakers have (hopefully) learned from past mistakes
  • Politicians better understand (fingers crossed) the cost of high inflation and the importance of letting the Fed operate independently.

What does the past teach us about today? 

When you hear people saying that inflation is rising, it’s helpful to have some context. That’s best understood by looking at the core PCE index (short for personal consumption expenditures), an index that measures inflation and excludes the more volatile food and energy prices. Through February, this index rose 1.4% from the same period in 2020. That’s a slight uptick from a few months ago when the rate was 1.3%. 

And finally, let’s tackle the burning question that’s at the core of the chatter: Where is inflation heading? Goldman Sachs’ economists have tackled that question from all angles, examined the various risks and even introduced a new monthly inflation monitor. As of early April, they forecast that inflation will remain “fairly tame” ahead and expect that the core PCE rate will to rise to as high as 2.2% by 2024, which is still in line with the Fed’s goal.

This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.  Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.