The inflation of the 1970s was the longest such episode, and the one that people remember. But Biden’s economists argued that it was a poor model for what was happening in 2021, which they attributed largely to supply disruptions as the economy emerged from the Covid pandemic.

A better parallel, they argued, was the inflation surge after World War II, as America struggled with the adjustment back to a peacetime economy. As they noted, that inflation surge was intense but transitory: as the economy adjusted, inflation quickly faded away without a prolonged period of high unemployment.

A few economists, notably Joseph Gagnon at the Peterson Institute for International Economics, argued that there were also parallels with the Korean War inflation, which was similarly intense but transitory.

These analyses have aged well, while comparisons to the 70s have not. Inflation went higher and stayed elevated longer than those Biden economists expected, and we still aren’t fully back to prepandemic inflation. Nonetheless, if we extend the inflation timeline to the present, the Biden-era surge looks a lot more like the postwar surge than the 70s. Inflation shot up only temporarily, then faded away without a recession or high unemployment:

Give this reality, Bessent’s assertion that tariffs will simply be offset by price declines elsewhere is pure fantasy.

Now, monetary stories about inflation work in extreme cases. When governments print money to cover their bills, and the money supply (by any measure) is rising at hundreds or thousands of percent each year, this will indeed cause inflation.

But such experiences hold few lessons for the United States, which doesn’t rely on the printing press to cover its bills and considers 5 percent inflation high. As I mentioned at the beginning of this post, U.S. inflation between 1990 and 2019 was low enough that people didn’t think about it much. As it turns out, there was a lot of variation in the money supply over that period — but these fluctuations had no visible effect on inflation:

None of this means that the Federal Reserve, which can effectively control short-term interest rates by adding to or subtracting from bank reserves, is irrelevant. It can fight inflation by raising interest rates, sending the economy into a recession. It can feed inflation by keeping rates too low and allowing the economy to overheat. But the idea that inflation is only about the money supply is all wrong and completely unhelpful in understanding recent inflation.

The Biden inflation cycle

President Biden enacted the American Rescue Plan soon after taking office. It was big — \(1.9 trillion, which is a lot even in an economy as big as ours. And some economists, notably Larry Summers, warned that it would overstimulate the economy and be highly inflationary. Other economists, myself included, downplayed the risks. Large parts of the bill, like aid to state and local governments, wouldn’t do much to stimulate the economy right away; that money would be spent gradually. Also, historical experience seemed to show that even if the economy became overheated, this would lead to a relatively modest and temporary rise in inflation. Obviously we were wrong to be complacent, and I have [admitted that](https://www.nytimes.com/2022/07/21/opinion/paul-krugman-inflation.html). Inflation quickly shot up to rates not seen in four decades: s_!keXV!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fd60b4699-99e5-4501-a4cb-62b14cf9d6f1_800x450.png)

Alert readers will notice that this chart doesn’t use the ordinary Consumer Price Index. It uses the Harmonized Index of Consumer Prices, which is how European statistical agencies measure inflation, but is also available for the United States. I use that measure to facilitate international comparisons. But for 2021-22, it doesn’t matter what measure you use: inflation did, in fact, soar. Why?

It would be foolish to deny that the Biden stimulus played some role in pumping up demand and hence feeding inflation. But there were other things happening too, largely disruptions associated with Covid and its aftermath. Consumer spending revived after the initial shock of the pandemic, but people spent their money differently from before. Notably, they became reluctant to consume services, which often involve in-person contact and the risk of infection. Instead, they bought physical stuff: kitchen equipment instead of restaurant meals, exercise equipment instead of going to the gym, and more.

And it turned out that supply chains — the infrastructure that gets stuff to consumers — didn’t have the capacity to handle the sudden rise in demand for physical goods. For example, there was a period when container ships were steaming back and forth off the coast of California, waiting for a chance to unload.

The New York Fed calculates an index of supply chain pressures, which spiked briefly during the worst of the pandemic (remember the toilet paper shortage?), subsided, then surged in 2021-22 — a surge that correlates closely with the surge in inflation:

Source: Survey of Professional Forecasters

It’s true that forecasters don’t set business prices, but the Survey probably gives us a pretty good sense of the general consensus in the business world. And even when recent U.S. inflation peaked, there was nothing like the circa 1980 belief that inflation would remain very high for years, a belief that had to be broken with a severe recession.

Indeed, high inflation didn’t persist; at the end of 2024 inflation was at most a fraction of a percentage point above the Fed’s target. But the public was still angry over high prices, and a significant number of voters believed Trump when he said he would bring grocery prices down on Day One of his presidency.

It was an absurd promise, and the public seems to have quite suddenly realized that almost everything Trump is doing on the economic front will increase, not reduce, inflation. But how bad will Trumpflation get?

Trumpflation

During the 2024 presidential campaign Donald Trump clearly stated his intention to pursue policies that the great majority of economists believed would stoke inflation: high tariffs, widespread deportation of immigrant workers, and erosion of Federal Reserve independence.

Yet most voters don’t seem to have understood the inflationary impacts of Trump’s policy ideas, while businesses and investors didn’t take Trump’s promises seriously. They expected him to behave the way he did in his first term, pursuing some unorthodox policies at the margin but mostly just cutting taxes and eliminating regulation.

At this point, however, it’s clear that Trump’s old restraint is gone.

Trade War 2.0 is already much bigger than the limited trade war of 2017-18. We don’t know where things will end up, but at this point it will be really surprising if we don’t end up with 25 percent or more tariffs on most of our major trading partners. Deportations haven’t really ramped up yet, but reports say that Trump is frustrated that they aren’t happening faster, and it’s a good bet that we’ll be seeing large-scale arrests and possibly the creation of major detention facilities soon. I’ll get to the Fed later.

How big will the inflation impact be? Imports of goods are about 11 percent of GDP, so a 25 percent tariff would, other things equal, raise prices by about 0.25*11=2.75 percent. A crackdown on undocumented workers — which we can already see would probably sweep up many legal immigrants too — would wreak havoc on agriculture, meat processing, construction and more, although it’s hard to put a number on this until we have a better idea of just how far the crackdown will go.

All in all, however, it seems likely that we’re looking at a self-imposed inflation shock comparable to or exceeding the size of the supply-chain disruptions of 2021-22.

This inflation shock might be mitigated if Trump’s tariffs lead to a stronger dollar. The logic here is that if tariffs reduce our spending on imports, that reduces the number of dollars we’re supplying to the world, which should cause the dollar to rise against other currencies like the euro, which in turn would make other countries’ exports to the United States cheaper in dollars.

But it’s not a given that the dollar will strengthen. For one thing, many of Trump’s tariffs will raise production costs, hurting exports and making it harder to replace imports despite tariff protection. For another, other countries will retaliate. And I’m thinking a bit about the foreign trade consequences of being ruled by madmen — more about that in another post.

Still, comparing the Trump shock to Covid-related supply disruptions has an upside. Remember, those disruptions caused a one-time bump in prices, not a sustained rise in inflation. Won’t the same be true of the impact of tariffs and deportations?

As someone whose political leanings aren’t a mystery, I’d like to say no, that Trumpflation will be much worse and more sustained than anything we experienced under Biden. But that’s a hard case to make. Given what we know now, I’d expect to see a year or two of nasty inflation, but not a return to 70s-style stagflation.

That is, that’s what to expect if Trump keeps his hands off monetary policy. If he doesn’t — if, for example, he’s frustrated by the persistence of U.S. trade deficits and forces the Fed to cut rates to weaken the dollar — then all bets are off.

Are we winning yet?