Impact The rapid rise of inflation all over the devel-
oped world posed a major problem for the govern-
ment. The pressure from voters to stem the deterio-
ration in their living standard made it exceptionally
difficult for governments at all levels to protect their
own budgets from deficits. Since a high proportion
of employees in Canada were government employ-
ees, they and their compensation tended to have a
significant effect on prices in the country. Further,
the deterioration in the prices of commodities, a ma-
jor component of Canadian exports, combined with
rising prices of imports, made it difficult to preserve
a balance in the Canadian economy.
Further Reading
Bothwell, Robert, Ian Drummond, and John En-
glish.Canada Since 1945.Rev. ed. Toronto: Uni-
versity of Toronto Press, 1989.
Crane, David.The Next Canadian Centur y: Building a
Competitive Economy.Toronto: Stoddart, 1992.
Organization for Economic Cooperation and Devel-
opment. Economic Surveys: Canada.Paris: OECD,
1980ff.
Nancy M. Gordon
See also Agriculture in Canada; Business and the
economy in Canada; Canada and the United States;
Canada Health Act of 1984; Health care in Canada;
Income and wages in Canada; Mulroney, Brian; Un-
employment in Canada.
Inflation in the United States
Definition Rate of increase in prices in the
United States
The 1980’s began with consumer prices rising by more than
10 percent per year, causing serious public discontent that
contributed to Ronald Reagan’s election to the presidency.
Slowing the rate of growth of the money supply and a decline
in world petroleum prices brought the inflation rate to lower
levels beginning in 1982.
Inflation had been a major problem in the United
States in the 1970’s, reflecting the great increase
in world petroleum prices generated by the Organi-
zation of Petroleum-Exporting Countries (OPEC)
cartel and the misguided efforts of the U.S. Federal
Reserve to reduce unemployment by rapidly ex-
panding the nation’s money supply. In 1979 and
1980, consumer prices rose about 13 percent per
year.Causes of Inflation Higher oil prices made the
American public worse off, transferring real income
to the oil-exporting countries, chiefly those in the
Middle East, and lowering output and employment
in the years of major oil-price increases. Most of the
discomfort caused by this inflation, however, re-
sulted from unanticipated and poorly understood
shifts of income and wealth within the United States.
After all, a higher price paid by some meant a higher
price received by others, but inflation anxiety af-
flicted even people who benefited from the process.
Few people understood the underlying monetary
causes, and paying higher prices made people feel
victimized.
Since monetary inflation occurs in response to
rising demand for goods and services, the process
tends to raise the money value of wages, as well as of
products. In the 1980’s, however, wages did not keep
pace with prices. Average weekly earnings, when val-
ued in 1982 dollars, were more than 10 percent
lower during the 1980’s than they had been in the
previous decade. These earnings data do not in-
clude fringe benefits, however, which were also ris-
ing. Some economists suggested that price indexes
overstated inflation, because they did not allow suffi-
ciently for improvements in the quality and variety
of products.
Rising prices meant that the value of each dollar
of actual money holdings declined. However, persis-
tent high interest rates compensated wealth holders
for the declining value of the dollar. Because Social
Security benefits had been indexed, moreover, ben-
eficiaries received higher payments to offset higher
living costs. The program’s benefit payments dou-
bled over the course of the decade, partly because
the number of beneficiaries rose from 22 million to
28 million. Indexation was extended to the personal
income tax in the early 1980’s, reducing the ten-
dency for inflation to push people into a higher tax
bracket.
Encouraged by the 1980 election results, Federal
Reserve chief Paul Volcker took steps to reduce the
growth rate of the money supply. In the short run,
this put the economy through a painful economic
recession. The inflation rate quickly receded, falling
below 4 percent in each year from 1982 to 1986. This514 Inflation in the United States The Eighties in America