There’s an immense amount of confusion in the financial press about the possibility of runaway inflation.

There are two reasons behind this, I think. The last bout of this kind of inflation in the US happened in the second half of the 1970s. That’s almost a half-century ago, so there aren’t that many people still working who have experienced the phenomenon. Second, for most reporters today, like most politicians, a dramatic presentation is much more important than showing actual expertise or mastery of the facts.

Lots of stuff happened in the 1970s: two oil shocks; overall price controls; sharp increases in food prices. The overall rate of increase in Personal Consumption Expenditures index (PCE), the Fed’s preferred measure of inflation, during the second half of the 1970s was:

1976 +5.0%

1977 +5.9%

1978 +7.8%

1979 +9.5%

1H1980 +11.0%.

That was bad, but not the worst. That’s because a considerable number of workers at that time had contracts that adjusted their wages up for inflation. Many, though, didn’t.

The really bad thing happened when inflation began to seriously erode the purchasing power of savings in bank accounts or in fixed income instruments. Seeing their purchasing power erode, individuals–and even big publicly-held companies–started to put their cash as fast as they could into tangible assets, like gold, or jewelry, or real estate, or coins and stamps, or timberland, or comic books or just big stashes of stuff they might need one day (or hoped they could resell at a higher price).

That was the really bad thing, the change in expectations about inflation, and resulting loss of confidence in the currency. It took about a decade of very high interest rates (and resulting economic pain) to subdue these there’ll-be-ever-higher-inflation impulses.

The important question, I think, is whether we’re on the verge of a rerun of the late 1970s. Personally, I don’t think so. The experience of the past forty+ years have instilled the idea that high levels of inflation won’t happen. In fact, today’s inflation “problem,” if there is one is that for six of the past eight years inflation has remained below the government target of +2.0%.

Recent US figures, using the CPI (which overstates inflation a bit):

2013 +1.5%

2014 +1.6%

2015 +0.1%

2016 +1.3%

2017 +2.1%

2018 +2.4%

2019 +1.8%

2020 +1.2%

2021 through March +1.9%.

To sum up, the most important question for assessing inflationary tendencies is are we seeing the kind of panic buying and hoarding that characterized the late 1970s in the US?

more tomorrow