Some Thoughts on U.S. Inflation

November 15, 2016

This note considers changing U.S. inflation over the past half century, using total consumer prices rather than core CPI or the consumer spending price deflator. For the purposes of a study covering decades, core CPI and headline CPI should in theory converge. Consumer prices were selected rather than the PCE deflator simply for easier access to such a long data series.

It’s been a long time that talk about rising U.S. inflation has been as prevalent as during the past week. Some people all along have said that an upturn in inflation lies just around the corner. Much of those predictions were fanned by the sharp rise in the federal deficit during the 1980s and 2000s as well as forecasts that the deficit is headed higher in the future. Until now, the higher inflation around the corner school of thought has been woefully wrong.

In the ten years between September 1966 and September 1976, the U.S. CPI rose 5.9% per annum. Over the next ten years to September 1986, the annualized pace was 6.7%. There was a 3 percentage point reduction to 3.7% during the following decade through September 1996, but inflation was still behaving in a very secular fashion. The highly cyclical component saw on-year inflation plunge from 14.8% in March 1980 to 2.5% in July 1983 but rebound to 4.8% by March 1984. Inflation fell anew to 1.1% in December 1986 but rebound to 6.3% in November 1990.

Greater progress in reducing inflation during the Clinton and Bush43 administrations saw CPI growth slow to 2.5% in the ten years to September 2006 despite a resurgence of federal deficit spending in the latter part of the period. Still, 2.5% exceeded the Fed’s ideal of 2.0%. Then the Great Recession came, transforming low inflation into a global phenomenon. Just as it once seems incredibly hard to secure a sustained drop in inflation, it’s been even harder to raise inflation that’s been too low. Several economies slipped into deflation, notably Japan. In the U.S. case, consumer prices increased 1.75% per year during the ten years to September 2016 but merely 1.33% a year in the second half of that period. Over the latest reported twelve months, total consumer prices increased 1.5%, not much above the 5-year pace.

One should not underestimate the amount of change that President-Elect Trump seeks, and he has the political wherewithal in Congress and the courts to do just about his entire agenda. Raising inflation in current circumstances is not a bad thing. Far from it. If that can be accomplished, stronger economic growth will happen, too.

But it’s quite possible that inflation doesn’t accelerate as much as the past week’s move in sovereign debt yields suggests. For one thing, inflation has become a more global phenomenon than was the case in the 1970s. Can U.S. inflation move above 4% or even 3.0% if other parts of the world like Japan have sub-1% inflation or even deflation? Can it do so unless the dollar reverses course and heads down? The mere whiff of planned macroeconomic policies in the United States has instead buoyed the dollar sharply this past week. Finally, the new administration is going to be reluctant to let inflation rip. With a core value of making America great again, comparisons to the Carter years would be a highly sensitive development. ┬áThere is likely to little tolerance for that.

Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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