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.
Year in review
Inflation in 1981
The U.S. inflation rate in 1981 was 10.3% (CPI: 90.9). Convert 1981 dollars to today →
10.3% 1981 inflation rate
5.6% 1980s average
11.8% peak month (Jan)
8.9% lowest month (Dec)
What things cost in 1981
| Median household income | $19,074 |
|---|---|
| Gas (per gallon) | $1.31 |
| Median home price | $68,900 |
| First-class stamp | $0.18 |
| Federal minimum wage | $3.35 |
What $100 from 1981 was worth later
| In 1990 | $144 |
|---|---|
| In 2000 | $189 |
| In 2010 | $240 |
| In 2020 | $285 |
| In 2026 | $364 |
Inflation in 1981, month by month
| Month | CPI-U | 12-month rate |
|---|---|---|
| January | 87 | 11.8% |
| February | 87.9 | 11.4% |
| March | 88.5 | 10.5% |
| April | 89.1 | 10.0% |
| May | 89.8 | 9.8% |
| June | 90.6 | 9.6% |
| July | 91.6 | 10.8% |
| August | 92.3 | 10.8% |
| September | 93.2 | 11.0% |
| October | 93.4 | 10.1% |
| November | 93.7 | 9.6% |
| December | 94 | 8.9% |
Economic events of 1981
- The Fed pushes its policy rate above 19%, the highest in U.S. history Chairman Paul Volcker had abandoned the stop-and-go policies of the 1970s, which had repeatedly eased up before inflation was beaten. By deliberately restricting the money supply and letting interest rates go wherever that took them, the Fed aimed to break the decade-old expectation that high inflation was permanent.
- Mortgage rates peak above 18%; housing and autos freeze The average 30-year mortgage reached about 18.5% in October 1981, still the all-time record. Home construction and car sales collapsed, and homebuilders famously mailed two-by-fours to the Fed in protest at rates that had priced their customers out of the market.
- The recession that finally breaks inflation begins in July This was the second dip of a double-dip; a brief recession in 1980 had already come and gone. The 1981–82 downturn lasted sixteen months and drove unemployment to 10.8%, the postwar record until 2020. It was the deliberate price of ending inflation, and it worked: the rate fell from 10.3% in 1981 to 3.2% by 1983.
- Congress passes the Economic Recovery Tax Act in August The era's signature tax cut phased individual income-tax rates down by roughly a quarter over three years. For inflation history, its lasting change was indexing tax brackets to the CPI (from 1985), ending "bracket creep", the quiet tax increase inflation had imposed by pushing unchanged real incomes into higher brackets.
- First-class postage rises twice in one year, from 15¢ to 18¢ to 20¢ A 33% increase in the price of mailing a letter within eight months, a small but memorable example of how fast costs were still moving through the economy.
Sources: U.S. Census Bureau, Current Population Survey (income); U.S. Census Bureau, New Residential Sales (home price); U.S. Energy Information Administration (gasoline); U.S. Department of Labor (minimum wage); USPS historical rates.
Inflation figures: U.S. Bureau of Labor Statistics, CPI-U annual averages. See the methodology.