For most people, prolonged high inflation is either a distant memory or an abstract concept. If you remember Barnaby Jones or the Gong Show, you may recall the relentless upward spiral of gas and food prices of the early 1980s. For those too young to have witnessed the grocer changing price stickers on cans of Green Giant peas, it is difficult to appreciate the insidious and destructive impact of runaway inflation, especially upon retirees living on fixed incomes. With difficult policy choices and no small amount of pain, America subdued the threat and has enjoyed a long run of remarkable stability despite numerous warnings of imminent resurgence.
So, after years of inflation Cassandras issuing false alarms, could we finally be on the cusp of a reprise?
Depending on the source, inflation is just around the corner. Or not. The Federal Reserve and the Treasury Secretary believe the threat is quite modest and actually want inflation to heat up just a bit as a treatment for unemployment. Other economists opine that massive fiscal and monetary stimulus will conspire with the pandemic reopening to trigger a surge in prices. Time will tell, and while numerous warnings over the past 20 years have proven empty, this time could be different given the current environment.
To fully appreciate the deleterious effect of structural inflation, consider the aforementioned period, known as the “Great Inflation”, from 1965 to 1982. At its zenith in 1980, the annualized rate of inflation as measured by the Consumer Price Index (CPI) reached a whopping 15%. This implies that on average, goods and services were increasing in price at a pace that would double every 5 years. Policymakers won a hard-fought battle that tamed the beast and produced an average annual inflation rate of 2.8% over the intervening 40 years, roughly tripling prices in the aggregate over that span. The Fed’s stated target is an average 2% annual rate, but over the past decade the realized rate has remained stuck at around 1.5%. In an effort to address the lingering unemployment in the service sector due to the pandemic, the central bank has stated its intention to allow inflation to run “hot”, above the 2% target, for at least some period of time in an effort to boost job creation.
But to paraphrase Aesop, one must be careful what one asks for. Economists recognize that inflation, once unleashed, can accelerate quickly and requires bitter medicine to cure after the infection has spread. Given recent upward pressure in energy, food, commodity and housing prices, investors are growing increasingly wary of the potential for a reignition of inflation that may surge beyond the Fed’s ability to easily tamp down.