Capital markets are signaling increasing concerns about inflation as the economy recovers from the great virus crisis. Many experts are concerned that further cost-of-living increases will result as consumer demand outstrips supply.

On the other hand, the Federal Reserve believes inflation pressures caused from a near-term imbalance between demand and supply is transitory. But history teaches that inflation fears must be addressed early to avoid serious economic pain.

As the economy re-opens, the danger is that the US will experience a classic case of too much money chasing too few goods. There has been rampant money printing, and money that has been sitting in people’s bank accounts can now finally be spent.

Supply has been restricted by furloughs, mask wearing, social distancing and other policies to contain the pandemic. The Fed’s position is that recent increases in the prices of food, construction materials, used cars and gasoline, along with scattered labor shortages and surging home prices, will quickly fade post-pandemic.

But the Fed flooding the economy with massive amounts of liquidity may set the stage for a possible surge in price levels, stoking inflation. These fears are grounded in the 1970s, when the US underwent a period of double-digit inflation that led to painful memories for Americans who experienced the so-called Great Inflation.

During that time, inflation soared from a negligible 1.6 percent in 1965 to 13.5 percent in 1980. Stable prices provide people with a sense of security. They are like safe streets and clean drinking water. During the Great Inflation, people couldn’t predict whether their wages would keep pace with large price increases that had become the norm.

Inflation was blamed on such factors as President Nixon suspending the convertibility of the dollar into gold, which caused the value of the dollar to drop and triggered higher import prices; two oil price shocks; the massive cost of the Vietnam War; monetary policy mistakes; and the breakup of the Beatles.

People began to expect continuous price increases, so they bought more goods. Increased demand pushed up prices, leading to demands for higher wages, which triggered even higher prices, leading to a continuing upward spiral.

For example, labor contracts increasingly included automatic cost-of-living clauses that contributed to the inflationary wage-price spiral, and the government began to peg some payments, such as Social Security, to the Consumer Price Index, the best-known gauge of inflation. While these practices may have helped workers and retirees cope with inflation, they also perpetuated it.

Government’s ever-rising need for revenue increased the federal budget deficit and led to more government borrowing, which in turn pushed up interest rates and further increased costs for businesses and consumers.  With energy costs and interest rates high, business investment languished and unemployment exceeded 10 percent.  The simultaneous inflation and recession that followed wrecked many businesses and hurt countless Americans.

The Fed took drastic steps in the late 1970s and early 1980s, tightening monetary policy under legendary Chairman Paul Volcker to promote price stability and combat the persistent surge in inflation. Consequently, the federal funds rate soared from 10 percent at the start of 1979 to 19 percent by the middle of 1981. The unemployment rate peaked at 10.8 percent in late 1982.

During this severe recession, thousands of businesses failed because they did not have access to capital, and credit-dependent sectors of the economy, such as home and car sales, suffered dramatically. Volcker’s tight money policy was a tough pill to swallow, but it eventually had the desired effect. By the mid-1980s, inflation dipped below 5 percent.

The history of the Great Inflation holds important lessons for the future. One is that rising prices should be nipped in the bud, because there is no quick and painless fix for rampant inflation. The longer you wait to deal with it, the harder it becomes.

As the economist and philosopher Friedrich Hayek put it, “Taming inflation is like catching a tiger by the tail.”