The decade between 1940 and 1950 saw a dramatic decrease in U.S. wage inequality -- the only such period in at least a century. The finding, documented in a seminal 1992 paper by Nobel Prize-winner Claudia Goldin of Harvard University and Robert Margo of Boston University, has been termed the "Great Compression."

But was the Great Compression really so ... great? Or was it more theoretical than real?

After all, inflation was rampant during the WWII era. From 1940 to 1950, the Consumer Price Index rose by 72 percent -- an average annual inflation rate of more than 5 percent per year. Goldin and Margo assumed that all households experienced similar changes to their purchasing power over this era. But if lower-income households were hit much harder by inflation than higher-income households -- as has been the case in more recent decades -- then the extent to which households truly experienced reduced inequality might have been less than previously thought.

"I'm from Argentina; inflation is always on my mind because inflation in my country has been high, on and off, for over four decades now," says Carola Frydman, a professor of finance at Kellogg (and a mentee of Goldin's in graduate school). "In the U.S., it's been something we've thought about much less."

In a new paper, Frydman and coauthor Raven Molloy, deputy associate director at the Federal Reserve Board of Governors (and another of Goldin's mentees), performed a kind of stress test on Goldin and Margo's key "Great Compression" finding. To do this, the researchers combined detailed data on socioeconomic groups' expenditures and on price changes between 1940 and 1950.

Frydman and Molloy discovered that, in fact, any socioeconomic group differences in inflation during the 1940s were vanishingly small -- only about one-twentieth of the average inflation rate of that period. In other words, the "Great Compression" was just as real -- and as dramatic -- as Goldin and Margo's work had suggested.

"At a time when inflation is again relatively high, and debates on who will pay its costs have resurfaced," the researchers write, "it becomes ever more important to learn from past experience."

Price checks

In the late summer of 2022, as post-Covid-19 inflation neared its peak, Federal Reserve Chair Jerome Powell noted in a speech about inflation-fighting monetary policy that "the burdens of high inflation fall heaviest on those who are least able to bear them."

Indeed, research analyzing data since the 1980s has indicated that different income groups do experience inflation differently. For example, during the Great Recession that followed the 2008 financial crisis, inflation rose more significantly for people in the lowest income groups than it did for those in the highest.