Note when the inflation rate began its long sharp decline. That’s right, it was in June of 1981, roughly six months before Volcker’s high interest rates threw the economy into a recession. This means that inflation was already falling rapidly when Volcker decided to make the tough call of throwing millions of ordinary workers out of their jobs.

The most obvious explanation for the drop in inflation is the drop in world oil prices. These had gone from less than $10 a barrel to 1978 to a peak over $40 a barrel in 1979, as Iran’s oil was pulled off world markets due to the Iranian revolution. In response to the surge in oil prices, new sources of oil came on line all over the world and people began to consume less, both in response to higher prices and government conservation measures (e.g. fuel mileage standards).

The drop in oil prices would have lowered inflation regardless of what Volcker did, although the recession undoubtedly did push down inflation further and faster than would have otherwise been the case. This was at the cost of a sharp drop in wages for most of the workforce and also the permanent loss of employment for many. Even a decade after the Volcker recession, employment among prime age men (ages 25-54) was still a full percentage point below the pre-recession level.

—Dean Baker
Robert Samuelson Wants to Give Reagan Credit