What happened to prices between 1981 and 1988
Between 1981 and 1988, the Consumer Price Index went from 90.9 to 118.3. Cumulatively, prices increased 30.1%, which works out to an average of 3.84% per year. Put differently, a dollar in 1981 bought what $0.77 buys in 1988.
1981 was the year the inflation fever finally broke, at an extraordinary price. Consumer prices rose 10.3%, the second year of back-to-back double-digit inflation and the last time the U.S. would see one. To end it, Paul Volcker’s Federal Reserve drove its policy rate above 19% and let borrowing costs go where they may: a 30-year mortgage cost more than 18% by autumn, car loans and business credit froze, and homebuilders mailed the Fed two-by-fours in protest. The squeeze tipped the economy into recession in July, the deep 1981–82 downturn that would push unemployment past 10%. But it worked. Inflation fell by nearly half within a year and to under 4% by 1983, the disinflation that defined the following two decades. Even the price of mailing a letter told the year’s story: postage went up twice in eight months.