slowing of inflation was aided by declining world
oil prices, which helped household energy prices
(which shot up by 30 percent in 1980-1981) to stabi-
lize and ultimately to decline by 20 percent in 1986.
Energy prices were lower in 1986-1989 than they had
been in 1981.
Interest Rates An important lesson of the 1970’s
was that interest rates tended to rise in proportion to
people’s expectations of inflation. A rise in the ex-
pected inflation rate made borrowers more eager
to borrow, since they could repay their loans with
cheaper dollars. Higher expected inflation made
lenders less willing to lend, as they would be repaid
in those same cheaper dollars. As actual inflation
declined in the early 1980’s, the waning of inflation
expectations moved interest rates gradually down-
ward. High-grade corporate bonds, which yielded
about 14 percent in 1981-1982, yielded about 9 per-
cent in 1986-1989. The fall in yields meant market-
able bonds fetched higher prices, helping compen-
sate bondholders for their loss of purchasing power
through inflation.
Even in 1989, however, interest rates were still
high by historical standards. In combination with
the annual increases in stock prices (in every year of
the decade except 1987), the high interest rates
made American assets attractive to international in-The Eighties in America Inflation in the United States 515
Consumer Price Index Figures for the United States, 1980-1989The Consumer Price Index (CPI) is an important indicator of the rate of inflation. The index measures
the average change over time in the prices that consumers in urban areas of the United States pay for
various goods and services. The Bureau of Labor Statistic (BLS), which calculates the index, has set the
average index level at the thirty-six-month period covering the years 1982, 1983, and 1984; this level is
equal to100. BLS then measures changes in prices in relation to that figure. An index of 110, for exam-
ple, means there has been a 10-percent increase in prices since the reference period; similarly, an index
of 90 means there has been a 10-percent decrease. During the 1980’s, the CPI rose every year, as the costs
of consumer goods and services climbed. Increases in some items were relatively small; the costs of trans-
portation, for example, rose by 24.6 percent during the decade, and transportation costs increased by
27.5 percent. However, medical care costs skyrocketed, increasing by more than 66 percent from 1980
through 1989. The following CPI figures measure the costs of all items in the index, as well as some se-
lected items, for consumers residing in all urban areas of the United States during the 1980’s:Year All ItemsFood and
BeveragesApparel
and Upkeep Transportation Medical Care
1980 82.4 86.7 90.9 83.1 74.9
1981 90.9 93.5 95.3 93.2 82.9
1982 96.5 97.3 97.8 97.0 92.5
1983 99.6 99.5 100.2 99.3 100.6
1984 103.9 103.2 102.1 103.7 106.8
1985 107.6 105.6 105.0 106.4 113.5
1986 109.6 109.1 105.9 102.3 122.0
1987 113.6 113.5 110.6 105.4 130.1
1988 118.3 118.2 115.4 108.7 138.6
1989 124.0 124.9 118.6 114.1 149.3
% change
1980-1989+36.9 +33.9 +24.6 +27.5 +66.1Source:U.S. Department of Labor, Bureau of Labor Statistics.