What Was the Consumer Price Index (CPI) During WWI?

The early 20th century, marked by World War I in 1914, profoundly disrupted established economic norms. This widespread conflict initiated unprecedented demand and resource reallocation, reshaping national economies. Understanding price level changes during this tumultuous era offers insights into the economic pressures faced by populations and governments. Analyzing consumer price movements helps illuminate the profound financial adjustments that occurred.

Understanding the Consumer Price Index

The Consumer Price Index (CPI) measures inflation, reflecting the average change in prices paid by urban consumers for a market basket of goods and services. The Bureau of Labor Statistics (BLS) calculates this index to gauge the purchasing power of money and indicate the economy’s health and direction. It encompasses a wide array of items, from food and housing to transportation and medical care, representing typical household expenditures.

To construct the CPI, prices for selected items are regularly collected from retail establishments, service providers, and rental units across various urban areas. Each item within the basket is assigned a weight based on its share of average household spending, ensuring that the index accurately reflects consumer expenditure patterns. The CPI is not a direct measure of the cost of living, but it is widely utilized to adjust income payments, such as Social Security and pensions, for changes in purchasing power.

CPI Trends During World War I

The period from 1914 to 1920 saw a sustained and significant increase in the Consumer Price Index in the United States. While inflation was relatively modest from 1913 to 1915, it accelerated sharply in 1916. The 12-month change in the CPI surged from 3.3 percent in January 1916 to double digits by October of that year.

The World War I era produced inflation rates largely unmatched since that time. Prices rose at an 18.5 percent annualized rate from December 1916 to June 1920, resulting in an increase of more than 80 percent during that timeframe. The All-Items CPI experienced a total increase of 72.7 percent from 1913 to 1929, largely driven by the wartime and immediate postwar volatility. This inflationary surge affected nearly all categories, with prices for most foods, clothing, and dry goods more than doubling.

The highest single-year price increase during this period was 23.7 percent from June 1919 to June 1920. This peak in the 12-month CPI increase exceeded those seen in later inflationary periods, including the post-World War II era and the early 1980s. Following this peak, a sharp decline in prices occurred, with a 15.8 percent drop from June 1920 to June 1921, representing a larger 12-month decrease than any observed during the Great Depression.

Key Factors Influencing WWI-Era CPI

Economic and geopolitical factors drove significant inflation during World War I. Massive government expenditures for the war effort, including munitions and supplies, substantially stimulated demand across various sectors. The total cost of the war to the United States was approximately $32 billion, representing about 52 percent of the gross national product. This immense spending was financed through increased taxes (22 percent), public borrowings (58 percent), and money creation (20 percent).

Supply chain disruptions also played a substantial role in escalating prices. Blockades and submarine warfare in Europe, coupled with diversion of domestic resources towards wartime production, limited consumer goods. The focus on military production meant that capacity for civilian goods was often reduced or eliminated, creating scarcity. Furthermore, the United States became a major supplier to Allied powers, with exports to Europe skyrocketing, further straining domestic supply.

Changes in the labor market contributed to inflationary pressures. Conscription removed men from the civilian workforce, while wartime industries created new employment opportunities. This led to a decline in unemployment and an increase in real wages in the industrial sector, contributing to higher consumer demand. The expansion of the money supply was also a factor, as the Federal Reserve supported war bond sales by lending to member banks at low interest rates.

While many European nations suspended their gold standards, the United States maintained convertibility but embargoed gold exports, leading to a significant inflow of gold into the country. This increased the monetary base and contributed to inflationary pressures. Government agencies like the War Industries Board attempted price and production controls, but their overall impact on resource reallocation was relatively small due to management challenges and late implementation.

Impact of Price Changes on Daily Life

The substantial price changes during World War I had profound effects on the daily lives of average citizens. Rapid inflation eroded the purchasing power of money, meaning each dollar could buy fewer goods and services. This presented significant challenges for households trying to maintain their living standards. For example, food prices, along with clothing and dry goods, more than doubled.

While industrial workers experienced some increases in real wages, these gains were often diminished by the surging cost of living. Families faced difficulties affording necessities as their household budgets stretched to cover rising expenses. The volatility of prices, with sharp increases followed by a significant decline post-war, created economic uncertainty.

Economic pressures during this period impacted different segments of society unevenly. Fixed-income earners, whose incomes did not adjust quickly to inflation, likely saw a reduction in their real wealth. In contrast, some industrial workers and farmers, benefiting from wartime demand and increased production, were better positioned to navigate the economic shifts. The overall environment of rapidly changing prices demanded constant adaptation from consumers as they sought to manage their finances.