Front-Page Graph of U.S. CPI Inflation in Today’s NYT Illustrates Big Difference in Current Spike from the 1970s Experience

July 14, 2022

It’s a difference noted before in this blog. The inflation that former Fed Chairman Volcker eventually slew was felt in three, each larger than the previous one and altogether encompassing fifteen years. The first wave from CPI inflation of a half-percent to a peak around 6% played out over five years. Inflation then receded back to 3% over the ensuing two years. The second wave saw inflation climb from 3% to 12.3%. This acceleration got a big impulse from the first OPEC price shock and overlapped with the Watergate scandal in 1972-74. Remember the WIN buttons (Whip Inflation Now) that the Ford Administration encouraged people to wear. Inflation did recede all the way to 4.9% late in 1976, only reignite and not crest until April 1980 at 14.8%.

The picture shows three waves, with successively higher starting points and higher peaks as well. CPI inflation in the first five years of the 1960s had not only been low but very stably so in ranging from 0.7% to 1.7% on a year-on-year basis. The initial transition from a long-term absence of U.S. inflation to level that caught the public’s attention — the first wave if you will — evolved quite gradually and in the middle reversed at one point by around 1.5 percentage points. This slow fuse in the previous experience encouraged monetary policymakers around the world and not just in the U.S. to believe that it would be safe to observe the return of inflation and not immediately hit such hard. The motto was patience, especially since unemployment was still well above pre-pandemic levels.

U.S. CPI inflation has mushroomed from 0.1% in May 2020 to 9.1% in June 2022. Far from the slow fuse seen in the latter 1960s, U.S. inflation this time around exploded into wildfire proportions within a year and half. In hindsight, precedent, which is an invaluable tool in economic forecasting, proved a very poor guide this time. Researchers will be spending a lot of time ferreting out the exact reasons for this difference. The onsets of the two experiences were more than 50 years apart, and it’s been a half century that has seen perhaps the most profound changes in the entire history of mankind.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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