The current inflation run is similar to other episodes in history, but with important differences

A customer’s groceries are telephoned at a store in San Francisco, California, United States, on Thursday, November 11, 2021.

David Paul Morris | Bloomberg | Getty Images

Critical supply chains are suffocated. Demand is skyrocketing. Prices are skyrocketing and everyone is starting to panic about inflation and wonder how long it’s going to last.

Is it 1945? 1916? 1974?

The answer, of course, is all of the above, and you can add 2021 to that as well.

Inflation is not something new to the United States, as the country has gone through seven episodes of lasting price spikes since World War II, including the current one, the strongest in 30 years. Coming out of the pandemic shock has been a difficult exercise for the world’s largest economy, and inflation has been a painful side effect.

But trying to find a historical parallel – and therefore perhaps a way out – is not easy. Almost every cycle has at least some similarities to the others, but each is unique in its own way.

The most common comparison these days is stagflation – low growth, high prices – environment of the 70s and early 80s. And while there is probably at least some validity to that, the reality is more complicated. .

“In terms of the magnitude of inflation, it affects pretty much everything. It’s widespread, or more than what we saw in the 1970s,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “The question is, how long does it stay high and when it recedes and at what rate does it level off?”

Most American policymakers reject the 1970s connection.

Executives such as Federal Reserve Chairman Jerome Powell, Treasury Secretary Janet Yellen and officials in the Biden administration view inflation as temporary and almost entirely due to factors unique to the pandemic. Once these factors subside, they see inflation drop, eventually reaching the level of 2% that the Fed sees as emblematic of a healthy and growing economy.

Some White House economists have argued that the current period does not resemble the era of stagflation, but rather the climate of the immediate postwar period, when price controls, supply problems and extraordinary demand fueled double-digit inflation gains that did not subside until after the late 1940s.

Inflation episodes in the United States

Consumer Price Index, percentage change from a year ago

Note: Periods of high inflation are shaded.

Source: Bureau of Labor Statistics (CPI), White House (inflationary periods until 2008). The data is

seasonally adjusted and on October 21.

Inflation episodes in the United States

Consumer price index, percentage change from

one year ago

The economic expansion of the late 1960s

Note: Periods of high inflation are shaded.

Source: Bureau of Labor Statistics (CPI), White

House (inflationary periods until ’08).

Data are seasonally adjusted and as of October 21.

Inflation episodes in the United States

Consumer Price Index, percentage change from a year ago

Note: Periods of high inflation are shaded.

Source: Bureau of Labor Statistics (CPI), White House (inflationary periods

’08). Data are seasonally adjusted and as of October 21.

“The current shortage of durable goods is similar – a national crisis necessitated disrupting normal production processes,” wrote a team of White House economists in a July 2021 article. “Instead of redirecting resources to supporting a war effort, manufacturing capacities have been temporarily closed or reduced to prevent contagion from COVID. “

Once the supply chain disruptions are corrected – and there are signs that at least major ports have become less congested in recent days – “inflation could quickly drop once the chains supply will be fully online and pent-up demand will have stabilized, ”the newspaper said.

Transient, permanent or “intermediate”

The idea that inflation is “transient” – a well-worn term that is no longer in fashion – is at the heart of the fiscal and monetary authorities’ insistence that an excessively accommodative policy is not to be expected. blame for soaring inflation.

However, easy politics have been at the heart of many previous cycles, and trying to blame it all on the pandemic hasn’t gone particularly well with consumers, whose confidence is at a decade’s low, and on Wall Street, where investors get nervous. over the duration of inflation.

Whether inflation is temporary, in fact, is probably the biggest debate going on in investor circles right now.

A customer injects gasoline into her vehicle at a gas station on November 22, 2021 in Miami, Florida.

Joe Raedle | Getty Images

“The debate is always written in black and white. The reality is that it is probably in between,” said Jim Paulsen, chief investment strategist at Leuthold Group.

In fact, Paulsen has studied inflation over the past century and found that while there may have been many periods where it became problematic, there are only two where it has been shown to be sustainable. : after World War I and in the aforementioned 1970s-early 1980s. .

It is largely in the camp that this race will pass as well, as it has been fueled in large part by supply chain issues that will eventually resolve themselves.

However, he is wary of making mistakes.

“It’s not as temporary as we initially thought, but I still think it’s the best chance” for it to pass in the coming months, said Paulsen. “But I would also say that this is without a doubt the biggest risk that it is not. If it is not, then it is a disastrous result not only for stocks but also for the company. economy if it’s really a runaway. “

The danger of inflation comes from the fact that this cycle is unlike any other in a major way: policymakers have never thrown anything close to this amount of money into the economy.

What if, next year, we not only declare a pseudo-victory against Covid, but also against inflation?

Jim Paulsen

Chief Investment Strategist, The Leuthold Group

“Policy abuse”

While Presidents Joe Biden and Yellen have insisted that not all fiscal and monetary stimulus are the underlying cause of inflation, the argument that nearly $ 10 trillion between Congress and the Fed did not raise prices is hard for some to swallow.

Even though Paulsen believes current conditions will ease in 2022, he is worried about what he calls “globally synchronized policy abuse.” Essentially, the meaning is that policymakers remain in an emergency position for an economic situation that appears to have passed the crisis phase, with the potential to spill over if the authorities continue to increase the pressure.

Yet he also sees falling commodity prices – with oil at the center – along with falling shipping costs and less congestion at ports as encouraging signs that inflation, at least in historical terms. , will prove to be temporary.

“What if next year we declare not only a pseudo-victory over Covid, but also over inflation? Paulsen said.

The emergence of a new variant of the Covid in South Africa complicates both questions. Even Powell, Bush and others in the transient inflation camp say the pandemic was the root cause of the price pressures, so if the new variant turns into a bigger threat, that means inflation stays higher longer.

Beside that, however, most mainstream economists stick to the belief that 2022 will herald a significant drop in inflation.

How it all ends

Mark Zandi, chief economist at Moody’s Analytics, agrees even though he says there are close parallels between the current situation and the soaring inflation of the 1970s.

On the one hand, he said the waves of this inflationary shock were both demand driven and the product of supply problems due to the oil embargoes at the time. Unions that have been successful in negotiating increases in the cost of living in contracts have also spurred the wage-price spiral.

A sensitive Fed has also contributed to the problems by taking inflation too lightly and resisting interest rate hikes that could have slowed the economy.

While Fed policymakers have been slow to tighten their positions these days, they have promised that if inflation expectations get out of balance, they will act. The worry, however, is that the Fed is already too late.

“The wage spiral we went through at the time was due to COLAs and exploding inflation expectations. They went up and the Fed didn’t recognize it and didn’t respond to it,” said Zandi. “Assuming each future wave of the virus is less disruptive, then, yes, I think we would see signs of moderation.”

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