Was 1970s inflation a one-time thing?

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FlyingMoose
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Was 1970s inflation a one-time thing?

Post by FlyingMoose » Sun Mar 22, 2020 5:04 pm

I'm wondering if the 1970s era inflation was a one-time event caused by removal from the gold standard and maybe the willingness of companies to pay employees more for productivity increases which they don't do any more. Is increased inflation like that even likely to happen again? People seem to act like it's a part of the business cycle that is expected to happen regularly, like stock market crashes.

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Re: Was 1970s inflation a one-time thing?

Post by RomeoMustDie » Sun Mar 22, 2020 6:28 pm

FlyingMoose wrote:
Sun Mar 22, 2020 5:04 pm
I'm wondering if the 1970s era inflation was a one-time event caused by removal from the gold standard and maybe the willingness of companies to pay employees more for productivity increases which they don't do any more. Is increased inflation like that even likely to happen again? People seem to act like it's a part of the business cycle that is expected to happen regularly, like stock market crashes.
I've also wondered the same thing and maybe one of the great minds here can provide some insight, but there were several factors affecting the market at that time that do not seem incredibly likely today.

It's probably fair to say too that we may have even stranger and more diverse crises happening in the future, the current crisis with COVID being a good example.

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Re: Was 1970s inflation a one-time thing?

Post by ScubaHogg » Sun Mar 22, 2020 6:34 pm

William Bernstein in the “ages of the investor” series reviews several instances of inflation worldwide, in different circumstances, times and places. So I don’t think there is a reason to think it can’t happen again in the US (I’m not saying it will or won’t, just that I don’t see a reason it couldn’t theoretically happen).
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Re: Was 1970s inflation a one-time thing?

Post by trueblueky » Sun Mar 22, 2020 6:38 pm

The U.S. consumer price index dates from 1914. Since then, major bouts of inflation have been associated with WWI, WWII, and oil shocks.

viewtopic.php?t=254580 shows a longer series.

Could something happen to restrict oil production or another resource? Or could there be a global war?

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Re: Was 1970s inflation a one-time thing?

Post by windaar » Sun Mar 22, 2020 6:44 pm

Going off silver coinage in 1965, off the gold standard in 1971, and the oil embargo of 1973 were all factors.
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Re: Was 1970s inflation a one-time thing?

Post by garlandwhizzer » Sun Mar 22, 2020 7:21 pm

Was 1970s inflation a one-time thing? Maybe, maybe not. There are strong secular forces that have been deceasing inflation for decades and continue to do so. Secular forces last a long time but they may weaken or even disappear in span of a decade or two. The other wild card for inflation is governmental policy. Governments seem unable to produce inflation with maximal monetary policy stimulus. On the other hand, profligate fiscal policy, massive amounts of deficit derived helicopter money dropped on the population have the potential to spur inflation. Significant inflation in the foreseeable future is very unlikely. The foreseeable future however is not forever.

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Re: Was 1970s inflation a one-time thing?

Post by Phineas J. Whoopee » Sun Mar 22, 2020 8:18 pm

The mid 1970s through early 1980s economic problems, particularly stagnation combined with inflation, were precipitated by the oil embargo. No doubt there were also other vulnerabilities and causes, but if it was Nixon taking the US dollar off the international gold standard and destroying Bretton Woods in 1971 it didn't show up until three years later. An oil shock happened again, for a different reason, in 1979.

I don't know what oil prices will be a year from now, but at present they're touching several decade lows, amid a price contest between The Kingdom of Saudi Arabia and The Russian Federation.

The US, with fracking, which many people think is a poor long-term idea environmentally, became the world's largest oil producer. Given greatly decreased crude prices, and no government-owned oil company to pick up the slack, it remains to be seen whether US production dominance will continue.

The specific situation in the mid 1970s through early 1980s may have been a one-time thing, but considerably increased inflation probably will happen again, eventually, for its own particular reasons.

Before anybody starts tossing around the H-word, hyperinflation is usually taken to mean at least 50% per month.

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Re: Was 1970s inflation a one-time thing?

Post by averagedude » Sun Mar 22, 2020 8:31 pm

Inflation is alive and well. Think Venzuala, Argentina, or Iran today. Many countries have and still experience this today. We will experience it also in the US in the future, but I don't know if it will happen in my lifetime.

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Re: Was 1970s inflation a one-time thing?

Post by columbia » Sun Mar 22, 2020 8:32 pm

Unique yes, one time no.
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Re: Was 1970s inflation a one-time thing?

Post by averagedude » Sat Apr 04, 2020 3:30 pm

Inflation in the US is asleep, perhaps in a long hibernation, but not dead. I fear that when it wakes up, it will be hungrier than ever.

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Re: Was 1970s inflation a one-time thing?

Post by HEDGEFUNDIE » Sat Apr 04, 2020 3:32 pm

With inflation the apropos motto is “the only thing you have to fear is fear itself”

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Re: Was 1970s inflation a one-time thing?

Post by SimpleGift » Sat Apr 04, 2020 4:17 pm

FlyingMoose wrote:
Sun Mar 22, 2020 5:04 pm
Is increased inflation like that even likely to happen again? People seem to act like it's a part of the business cycle that is expected to happen regularly, like stock market crashes.
Two lessons from the Great Inflation of the 1970s make it very unlikely to happen again, to my mind:
  • 1) The Fed learned that price stability is paramount for a strong and growing economy. Prior to Volcker, it was believed that tolerating high inflation could help to stimulate the economy. This proved to be a costly mistake.

    2) The public must be confident in the Fed's ability to loosen inflationary pressures. Prior to Volcker, the Fed's rather tepid policy responses caused folks to lose faith in their ability to stabilize prices.
This is not to say we won't ever see inflationary pressures in the U.S. economy and around the world again — but central banks are now much more focused on targeting inflation and prepared to act accordingly. Plus, peoples' expectations for low inflation are deeply entrenched now, which is a big help in keeping future inflation low.
Last edited by SimpleGift on Sat Apr 04, 2020 4:20 pm, edited 1 time in total.

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Re: Was 1970s inflation a one-time thing?

Post by anoop » Sat Apr 04, 2020 4:19 pm

We (as in developed nations) have been living off cheap labor and food from other countries for the last 30-40 years. In areas where this is not possible, like e.g. health care and education, costs have skyrocketed and they show no signs of slowing down. There has been tremendous reduction of redundancy in every area of the economy to the point where it has impacted resilience in ways that become apparent only during a crisis, but we have crises more and more frequently.

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Re: Was 1970s inflation a one-time thing?

Post by bobcat2 » Sat Apr 04, 2020 4:33 pm

FlyingMoose wrote:
Sun Mar 22, 2020 5:04 pm
I'm wondering if the 1970s era inflation was a one-time event ...
Annual inflation as measured by the CPI
1970-79 7.4%
1910-19 7.3%

So there were two decades of high inflation of the seven decades beginning in 1910 and ending in 1979. The decade of the 70s was definitely not a one time event during those seven decades of the 20th century. My parents and most of my aunts and uncles lived through both of those decades of high inflation.

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Re: Was 1970s inflation a one-time thing?

Post by Broken Man 1999 » Sat Apr 04, 2020 4:50 pm

I was fortunate enough to snag an 11 1/2% mortgage when we bought a townhouse. By the time we closed, mortgage interest rates were 13 1/2%.

But, honestly, DW and I were both working at MegaCorp, and we didn't suffer much over all.

Of course as retirees, inflation is always a concern for us.

No idea if we live long enough to see a recurrence of high inflation. If so, it will affect us much differently than the 70ties.

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Re: Was 1970s inflation a one-time thing?

Post by bobcat2 » Sat Apr 04, 2020 4:51 pm

trueblueky wrote:
Sun Mar 22, 2020 6:38 pm
The U.S. consumer price index dates from 1914.
The reason the CPI was started in the year 1914 is that by 1916 the US government was worried by the extremely high inflation rates that they knew existed, but couldn't measure accurately, in the major ship building metro areas along the east coast, as the nation was building military and commercial ships at a furious rate preparing for possible entry into WWI. The initial CPI, constructed I believe in 1916*, was initially extended back to 1914 to include a normal inflation year to compare with the 1915 and 1916 and beyond high inflation years. A few years later the CPI was extended further back in time earlier than 1914.

Thus, the reason the CPI was initially created was to measure the extremely high inflation that the nation endured in the second decade of the 20th century.
Prices in the World War I era
The year 1916 saw rapid acceleration in the inflation rate. The 12-month change in the CPI rose from 3.3 percent in January to double digits by October. The World War I era and its aftermath, 1917–1920, then produced sustained inflation unmatched in the nation anytime since. Prices rose at an 18.5-percent annualized rate from December 1916 to June 1920, increasing more than 80 percent during that period.

Even a cursory examination of CPI component indexes of the World War I era reveals the breadth of price increases during that period: virtually every series shows sharp increases. Even the series that increased more slowly, such as housing and fuel, were half again more expensive in 1920 than they were in 1915. The prices of most foods, clothing, and dry goods more than doubled. ...

It is beyond the scope of this article to analyze in detail the World War I–era economy, but surely, the inflation of that time was a result of the war effort. The war’s needs dominated policy and planning, with massive effects on resource allocation. One-fifth of the nation’s resources were devoted to the war effort in 1918,7 and the nonfarm labor force expanded sharply. Government involvement in the economy increased dramatically. ...

Monetary policy during the era was expansionary and surely contributed to the inflation of the time. Money supply measures roughly doubled from 1914 to 1919, with gross national product rising only by about a quarter.10 Fiscal policy featured both massive borrowing, much of it in the form of “Liberty Bonds,” and an extensive set of tax increases and surtaxes.11 Whatever the explanation, the late 1910s stand as the most inflationary period in U.S. history.
* The formal construction of the CPI was later than 1916.

Link to BLS article on inflation in the 1910s - https://www.bls.gov/opub/mlr/2014/artic ... rience.htm

BobK

edited to include quote and strike-out incorrect year when CPI was formally created.
Last edited by bobcat2 on Sat Apr 04, 2020 5:17 pm, edited 1 time in total.
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Re: Was 1970s inflation a one-time thing?

Post by bluquark » Sat Apr 04, 2020 4:56 pm

HEDGEFUNDIE wrote:
Sat Apr 04, 2020 3:32 pm
With inflation the apropos motto is “the only thing you have to fear is fear itself”
What mistakes do you think excessive fear of inflation leads to? Avoiding nominal bonds in favor of TIPS or more stocks doesn't seem like it can harm you much...
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Re: Was 1970s inflation a one-time thing?

Post by SimpleGift » Sat Apr 04, 2020 6:12 pm

One important aspect not mentioned so far in this thread is that U.S. inflation is increasingly determined by global factors and forces beyond our borders. So we need to shift our mental model in thinking about inflation to considering the global rate of inflation today, or at least the global co-movement of inflation rates.

And, fortunately, the world as whole is now much better positioned to fight inflation than just a few decades ago. From just 1 central bank with an explicit inflation target in 1990, the total has now grown to over 40 countries worldwide. Though we may indeed see inflationary pressures in the future, with explicit inflation targets now established at nearly all of the world's major central banks (and if they maintain their independence from political pressures), it's much less likely we'll see persistent high inflation again like in the 1970s.

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Re: Was 1970s inflation a one-time thing?

Post by HEDGEFUNDIE » Sat Apr 04, 2020 6:53 pm

bluquark wrote:
Sat Apr 04, 2020 4:56 pm
HEDGEFUNDIE wrote:
Sat Apr 04, 2020 3:32 pm
With inflation the apropos motto is “the only thing you have to fear is fear itself”
What mistakes do you think excessive fear of inflation leads to? Avoiding nominal bonds in favor of TIPS or more stocks doesn't seem like it can harm you much...
How about taking out a 30 year fixed rate mortgage at 1% to 1.5% higher rate than a comparable 5/1 ARM?

Thousands of dollars of extra interest paid per year

Or holding short term Treasuries that do nothing for you when stocks crash, leading you to more likely to sell your stocks at the worst time, when holding EDV instead would have scored you a nice gain on that part of your portfolio, keeping you from making any rash moves with your equities.

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Re: Was 1970s inflation a one-time thing?

Post by reln » Sat Apr 04, 2020 8:04 pm

FlyingMoose wrote:
Sun Mar 22, 2020 5:04 pm
I'm wondering if the 1970s era inflation was a one-time event caused by removal from the gold standard and maybe the willingness of companies to pay employees more for productivity increases which they don't do any more. Is increased inflation like that even likely to happen again? People seem to act like it's a part of the business cycle that is expected to happen regularly, like stock market crashes.
Of course no one knows. But it does seem unlikely since the Fed knows how to reduce inflation if it starts to get "too high".

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Re: Was 1970s inflation a one-time thing?

Post by Turbo29 » Sat Apr 04, 2020 8:11 pm

bobcat2 wrote:
Sat Apr 04, 2020 4:33 pm
FlyingMoose wrote:
Sun Mar 22, 2020 5:04 pm
I'm wondering if the 1970s era inflation was a one-time event ...
Annual inflation as measured by the CPI
1970-79 7.4%
1910-19 7.3%

So there were two decades of high inflation of the seven decades beginning in 1910 and ending in 1979. The decade of the 70s was definitely not a one time event during those seven decades of the 20th century. My parents and most of my aunts and uncles lived through both of those decades of high inflation.

BobK
Curious, what caused the inflation starting in 1910?
Edit: Unlike the 1970's, we were on the gold standard then too, 1oz gold = $20
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Re: Was 1970s inflation a one-time thing?

Post by bobcat2 » Sat Apr 04, 2020 11:09 pm

Turbo29 wrote:
Sat Apr 04, 2020 8:11 pm
bobcat2 wrote:
Sat Apr 04, 2020 4:33 pm
FlyingMoose wrote:
Sun Mar 22, 2020 5:04 pm
I'm wondering if the 1970s era inflation was a one-time event ...
Annual inflation as measured by the CPI
1970-79 7.4%
1910-19 7.3%

So there were two decades of high inflation of the seven decades beginning in 1910 and ending in 1979. The decade of the 70s was definitely not a one time event during those seven decades of the 20th century. My parents and most of my aunts and uncles lived through both of those decades of high inflation.

BobK
Curious, what caused the inflation starting in 1910?
Edit: Unlike the 1970's, we were on the gold standard then too, 1oz gold = $20

I've written the answer upthread, but I repeat it here.
Prices in the World War I era

The year 1916 saw rapid acceleration in the inflation rate. The 12-month change in the CPI rose from 3.3 percent in January to double digits by October. The World War I era and its aftermath, 1917–1920, then produced sustained inflation unmatched in the nation anytime since. Prices rose at an 18.5-percent annualized rate from December 1916 to June 1920, increasing more than 80 percent during that period.

Even a cursory examination of CPI component indexes of the World War I era reveals the breadth of price increases during that period: virtually every series shows sharp increases. Even the series that increased more slowly, such as housing and fuel, were half again more expensive in 1920 than they were in 1915. The prices of most foods, clothing, and dry goods more than doubled. ...

It is beyond the scope of this article to analyze in detail the World War I–era economy, but surely, the inflation of that time was a result of the war effort. The war’s needs dominated policy and planning, with massive effects on resource allocation. One-fifth of the nation’s resources were devoted to the war effort in 1918, and the nonfarm labor force expanded sharply. Government involvement in the economy increased dramatically. ...

Monetary policy during the era was expansionary and surely contributed to the inflation of the time. Money supply measures roughly doubled from 1914 to 1919, with gross national product rising only by about a quarter. Fiscal policy featured both massive borrowing, much of it in the form of “Liberty Bonds,” and an extensive set of tax increases and surtaxes. Whatever the explanation, the late 1910s stand as the most inflationary period in U.S. history.
Link to BLS article on inflation in the 1910s - https://www.bls.gov/opub/mlr/2014/artic ... rience.htm

BobK
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Re: Was 1970s inflation a one-time thing?

Post by nedsaid » Sun Apr 05, 2020 1:10 am

RomeoMustDie wrote:
Sun Mar 22, 2020 6:28 pm
FlyingMoose wrote:
Sun Mar 22, 2020 5:04 pm
I'm wondering if the 1970s era inflation was a one-time event caused by removal from the gold standard and maybe the willingness of companies to pay employees more for productivity increases which they don't do any more. Is increased inflation like that even likely to happen again? People seem to act like it's a part of the business cycle that is expected to happen regularly, like stock market crashes.
I've also wondered the same thing and maybe one of the great minds here can provide some insight, but there were several factors affecting the market at that time that do not seem incredibly likely today.

It's probably fair to say too that we may have even stranger and more diverse crises happening in the future, the current crisis with COVID being a good example.
Wow. Great question. Economists can't even agree exactly what causes inflation. Probably the best definition I can think of is too much money chasing too few goods. A supply shock like the Oil Embargo of 1973-74 can cause inflation but keep in mind that this followed years of President Johnson's Guns and Butter economic policies of the 1960's. Lots of demand from a war plus strong consumer demand. Wage pressures have a lot to do with this as does a strong economy. I would suspect that inflation occurs most late in an economic cycle. Monetarists saw inflation as a monetary phenomenon caused by too much money creation. Inflation is also affected by the credit cycle, credit expansion expands the money supply which in turn creates inflationary pressures. Many different ways to think about it. Cost push vs. demand pull.
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Re: Was 1970s inflation a one-time thing?

Post by White Coat Investor » Sun Apr 05, 2020 1:37 am

ScubaHogg wrote:
Sun Mar 22, 2020 6:34 pm
William Bernstein in the “ages of the investor” series reviews several instances of inflation worldwide, in different circumstances, times and places. So I don’t think there is a reason to think it can’t happen again in the US (I’m not saying it will or won’t, just that I don’t see a reason it couldn’t theoretically happen).
I'm sure it'll happen again. But I do think the 1970s taught us how to fight it. Just keep raising those interest rates until people are willing to leave their money in the bank. 10%. 20%. 200%. Whatever it takes.
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Re: Was 1970s inflation a one-time thing?

Post by Valuethinker » Sun Apr 05, 2020 2:39 am

bobcat2 wrote:
Sat Apr 04, 2020 4:51 pm
trueblueky wrote:
Sun Mar 22, 2020 6:38 pm
The U.S. consumer price index dates from 1914.
The reason the CPI was started in the year 1914 is that by 1916 the US government was worried by the extremely high inflation rates that they knew existed, but couldn't measure accurately, in the major ship building metro areas along the east coast, as the nation was building military and commercial ships at a furious rate preparing for possible entry into WWI. The initial CPI, constructed I believe in 1916*, was initially extended back to 1914 to include a normal inflation year to compare with the 1915 and 1916 and beyond high inflation years. A few years later the CPI was extended further back in time earlier than 1914.

Thus, the reason the CPI was initially created was to measure the extremely high inflation that the nation endured in the second decade of the 20th century.
Prices in the World War I era
The year 1916 saw rapid acceleration in the inflation rate. The 12-month change in the CPI rose from 3.3 percent in January to double digits by October. The World War I era and its aftermath, 1917–1920, then produced sustained inflation unmatched in the nation anytime since. Prices rose at an 18.5-percent annualized rate from December 1916 to June 1920, increasing more than 80 percent during that period.

Even a cursory examination of CPI component indexes of the World War I era reveals the breadth of price increases during that period: virtually every series shows sharp increases. Even the series that increased more slowly, such as housing and fuel, were half again more expensive in 1920 than they were in 1915. The prices of most foods, clothing, and dry goods more than doubled. ...

It is beyond the scope of this article to analyze in detail the World War I–era economy, but surely, the inflation of that time was a result of the war effort. The war’s needs dominated policy and planning, with massive effects on resource allocation. One-fifth of the nation’s resources were devoted to the war effort in 1918,7 and the nonfarm labor force expanded sharply. Government involvement in the economy increased dramatically. ...

Monetary policy during the era was expansionary and surely contributed to the inflation of the time. Money supply measures roughly doubled from 1914 to 1919, with gross national product rising only by about a quarter.10 Fiscal policy featured both massive borrowing, much of it in the form of “Liberty Bonds,” and an extensive set of tax increases and surtaxes.11 Whatever the explanation, the late 1910s stand as the most inflationary period in U.S. history.
* The formal construction of the CPI was later than 1916.

Link to BLS article on inflation in the 1910s - https://www.bls.gov/opub/mlr/2014/artic ... rience.htm

BobK

edited to include quote and strike-out incorrect year when CPI was formally created.
Book

Thank you for this very helpful insight.

I cannot read the article from where I am sitting, now but

Does it tell us what happened to inflation during the pandemic of 1918-19? I.e. what was inflation for those 3 years to 1920?

This will surely be the most interesting comparison to today?

An epidemic is both a supply shock and a demand shock. Supply because a proportion of the world economy is shut down. Food in Europe will rot in the fields if something is not done soon. But also a demand shock because we are not out spending.

That could be either inflationary or deflationary. Particularly in light of government stimulus. Both monetary and fiscal.

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Re: Was 1970s inflation a one-time thing?

Post by nedsaid » Sun Apr 05, 2020 4:06 am

I think an overlooked aspect of this is the mass psychology of the population. You get sort of a self fulfilling prophecy when inflation expectations set in, you buy something today because it might cost more tomorrow. It gets to be a thing that feeds upon itself. Why put money in the bank and save if the purchasing power of your savings decreases over time even after interest is paid? You may as well spend.

As far as White Coat Investor's observation that we can kill off inflation simply by jacking up interest rates. True, but you run the risk, and a very real risk of damaging the psyche of the population enough that people are convinced that hard times will continue and thus will refuse to spend. You put off buying something today because if hard times continue, you might need the money tomorrow. Public confidence was shattered during the Great Depression and people were convinced that hard times would continue indefinitely, one reason that various stimulus measures, well, just failed to stimulate. We run a similar risk with shutting down large sections of the economy to stop the coronavirus. The economy will bounce back fast if people believe it will, if they lose hope, a slow recovery could be a self-fulfilling prophecy. A big reason that we probably can't afford to have this shutdown go on too long.

Sort of like the Bush II Administration sending out $600 checks hoping Americans would spend the money and stimulate the economy. Folks could take that as a negative signal that Government leaders knew something bad that the general public did not. My mom and dad just took their check and put it in the bank. Sometimes stimulus doesn't stimulate, it is like pushing on a string because public confidence or lack thereof is so powerful.

My paternal grandparents understood the power of public confidence. Grandmother talked about this a lot and she was more right than she ever knew. She also understood good old supply and demand. I am surprised that economists seem to attach little importance to public confidence. I think it is an extremely powerful force in the economy.

On big reason that we have seen subdued inflation is that the Paul Volcker recession of the early 1980's killed off inflation expectations. To a large degree, inflation doesn't go up much because we don't expect it to. Once that psychology is broken, as they say, hold the horses. By the time that happens, the horses have escaped the barn, too late to shut the door.
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Re: Was 1970s inflation a one-time thing?

Post by bearcub » Sun Apr 05, 2020 4:32 am

I am retired with a large amount of my portfolio in the two Vanguard TIPS Funds. I do wonder how they will perform if we ever have 70"s type inflation again. Not praying for that to happen though.

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Re: Was 1970s inflation a one-time thing?

Post by Broken Man 1999 » Sun Apr 05, 2020 8:49 am

It is also possible we could see some deflation. I would have to think there are many out there who are being scarred pretty badly financially by the pandemic. They might be very reluctant to return to the former model of spending the US had before the virus. The virus might make some turn from being highly indebted to more conservative spenders.

Another possibility is we could see stagflation, something we have seen before as well.

The story is still developing, and we are just in the early chapters.

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Re: Was 1970s inflation a one-time thing?

Post by bobcat2 » Sun Apr 05, 2020 10:01 am

Valuethinker wrote:
Sun Apr 05, 2020 2:39 am

... what happened to inflation during the pandemic of 1918-19? I.e. what was inflation for those 3 years to 1920?

This will surely be the most interesting comparison to today?
Annual CPI Inflation (Dec/Dec)

Code: Select all

1915     2.0%
1916    12.6%
1917    18.1%
1918    20.4%  
1919    14.5%
1920     2.6% 
1921   -10.8%
There was inflation during the first six months of 1920. Deflation began in July and continued thru the rest of the year and 1921, as a deep recession took hold in the US and the country went through a painful transition from the all-out war effort of 1916-18 back to a normal peacetime economy.

Wilson may have campaigned for re-election in 1916 using the slogan "He kept us out of war", but the US in 1916 was gearing up for all-out war.

Link to CPI data
- https://www.bls.gov/cpi/tables/historic ... 201709.pdf
and
- https://inflationdata.com/articles/infl ... 1913-1919/

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Re: Was 1970s inflation a one-time thing?

Post by dkturner » Sun Apr 05, 2020 10:25 am

Inflation data obtained from Cambridge Associates:

1915 - 2.0%
1916 - 12.6%
1917 - 18.1%
1918 - 20.4%
1919 - 14.5%
1920 - 2.6%

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Re: Was 1970s inflation a one-time thing?

Post by willthrill81 » Sun Apr 05, 2020 10:31 am

White Coat Investor wrote:
Sun Apr 05, 2020 1:37 am
ScubaHogg wrote:
Sun Mar 22, 2020 6:34 pm
William Bernstein in the “ages of the investor” series reviews several instances of inflation worldwide, in different circumstances, times and places. So I don’t think there is a reason to think it can’t happen again in the US (I’m not saying it will or won’t, just that I don’t see a reason it couldn’t theoretically happen).
I'm sure it'll happen again. But I do think the 1970s taught us how to fight it. Just keep raising those interest rates until people are willing to leave their money in the bank. 10%. 20%. 200%. Whatever it takes.
You have to be really careful with that though. Everyone leaving their money in the bank is a great way to encourage deflation, which would decimate borrowers and significantly damage the economy. It's a case of trying to find the approximate equilibrium point where the risk of tipping too far to one side (e.g. deflation) is much worse than tipping too far to the other (e.g. inflation).
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Re: Was 1970s inflation a one-time thing?

Post by White Coat Investor » Sun Apr 05, 2020 10:42 am

willthrill81 wrote:
Sun Apr 05, 2020 10:31 am
White Coat Investor wrote:
Sun Apr 05, 2020 1:37 am
ScubaHogg wrote:
Sun Mar 22, 2020 6:34 pm
William Bernstein in the “ages of the investor” series reviews several instances of inflation worldwide, in different circumstances, times and places. So I don’t think there is a reason to think it can’t happen again in the US (I’m not saying it will or won’t, just that I don’t see a reason it couldn’t theoretically happen).
I'm sure it'll happen again. But I do think the 1970s taught us how to fight it. Just keep raising those interest rates until people are willing to leave their money in the bank. 10%. 20%. 200%. Whatever it takes.
You have to be really careful with that though. Everyone leaving their money in the bank is a great way to encourage deflation, which would decimate borrowers and significantly damage the economy. It's a case of trying to find the approximate equilibrium point where the risk of tipping too far to one side (e.g. deflation) is much worse than tipping too far to the other (e.g. inflation).
So you're saying one should lower rates as inflation falls so you don't overshoot? I agree.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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willthrill81
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Re: Was 1970s inflation a one-time thing?

Post by willthrill81 » Sun Apr 05, 2020 10:53 am

White Coat Investor wrote:
Sun Apr 05, 2020 10:42 am
willthrill81 wrote:
Sun Apr 05, 2020 10:31 am
White Coat Investor wrote:
Sun Apr 05, 2020 1:37 am
ScubaHogg wrote:
Sun Mar 22, 2020 6:34 pm
William Bernstein in the “ages of the investor” series reviews several instances of inflation worldwide, in different circumstances, times and places. So I don’t think there is a reason to think it can’t happen again in the US (I’m not saying it will or won’t, just that I don’t see a reason it couldn’t theoretically happen).
I'm sure it'll happen again. But I do think the 1970s taught us how to fight it. Just keep raising those interest rates until people are willing to leave their money in the bank. 10%. 20%. 200%. Whatever it takes.
You have to be really careful with that though. Everyone leaving their money in the bank is a great way to encourage deflation, which would decimate borrowers and significantly damage the economy. It's a case of trying to find the approximate equilibrium point where the risk of tipping too far to one side (e.g. deflation) is much worse than tipping too far to the other (e.g. inflation).
So you're saying one should lower rates as inflation falls so you don't overshoot? I agree.
Precisely.

However, the link between low (high) interest rates and high (low) inflation is modest, at best.

From 1990-1999, cumulative inflation was 32%. From 2000-2009, it was 28%. From 2010-2019, it was 19%. That would imply that interest rates were highest from 2010-2019, but exactly the opposite was true.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Was 1970s inflation a one-time thing?

Post by nisiprius » Sun Apr 05, 2020 11:00 am

Just to be clear, the broad consensus is that inflation per se is not always or necessarily bad. The central bank's job is to print the right amount of money and use other policies in order to produce the right amount of inflation. For decades now, central banks have acknowledged inflation targets, and for nearly a decade the Fed has publicly disclosed their target number, instead of just a vague range. That number is 2%, and the St. Louis Fed has given this explanation: Why the Fed Targets a 2 Percent Inflation Rate
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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SimpleGift
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Re: Was 1970s inflation a one-time thing?

Post by SimpleGift » Sun Apr 05, 2020 11:22 am

nisiprius wrote:
Sun Apr 05, 2020 11:00 am
For decades now, central banks have acknowledged inflation targets, and for nearly a decade the Fed has publicly disclosed their target number, instead of just a vague range. That number is 2%...
As is true for 40 countries around the world today, including most major developed and emerging economies. In the chart below, the actual inflation rate as of 5/28/19 is in orange, while the inflation target rates are blue and green:
Perhaps just as important, the mere existence of an explicit inflation target creates clear expectations among businesses, workers and households. If they all expect inflation to be, say 2%, then they'll set prices and compensation on that basis, creating a better chance that actual inflation will be close to the target.

This is a big reason why out-of-control, 1970s-style inflation is pretty unlikely to reoccur again, to my mind.
Last edited by SimpleGift on Sun Apr 05, 2020 11:28 am, edited 1 time in total.

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Re: Was 1970s inflation a one-time thing?

Post by nisiprius » Sun Apr 05, 2020 11:26 am

dkturner wrote:
Sun Apr 05, 2020 10:25 am
Inflation data obtained from Cambridge Associates:

1915 - 2.0%
1916 - 12.6%
1917 - 18.1%
1918 - 20.4%
1919 - 14.5%
1920 - 2.6%
Not that a secondary source is likely to be wrong, but note that it is fairly easy to go straight to the Bureau of Labor Statistics, series CUUR0000SA0:

https://data.bls.gov/timeseries/CUUR0000SA0

Change the "from" value to 1913, click "download as spreadsheet," and add a column to calculate percentage differences from December to December, and, voila:

Image

1915 1.98% (note: 10.3/10.1 - 1.00 = 1.98%)
1916 12.62% (note: 11.6/10.3 - 1.00 = 12.62%)
1917 18.10% (note: 13.7/11.6 - 1.00 = 18.10%)
1918 20.44% (note: 16.5/13.7 - 1.00 = 20.44%)
1919 14.55% (note: 18.9/16.5 - 1.00 = 14.55%)
1920 2.65% (note: 19.4/18.9 - 1.00 = 2.65%)

An advantage of knowing that you can get it directly from the BLS is that it makes it easier to explore and answer other questions...
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

spacecadet610
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Re: Was 1970s inflation a one-time thing?

Post by spacecadet610 » Sun Apr 05, 2020 11:41 am

With skyrocketing debt for the US including government, citizens and businesses I would expect inflation to be the only way to dig ourselves out of that hole. The higher the inflation, the less that debt is worth and easier to pay off.

This is what the government should want, I would think

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Re: Was 1970s inflation a one-time thing?

Post by willthrill81 » Sun Apr 05, 2020 11:54 am

spacecadet610 wrote:
Sun Apr 05, 2020 11:41 am
With skyrocketing debt for the US including government, citizens and businesses I would expect inflation to be the only way to dig ourselves out of that hole. The higher the inflation, the less that debt is worth and easier to pay off.
The problem is that much higher national debt accumulated over the last decade has not led to higher inflation. Inflation from 2010-2019 was very low.
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Re: Was 1970s inflation a one-time thing?

Post by cheese_breath » Sun Apr 05, 2020 12:26 pm

Broken Man 1999 wrote:
Sat Apr 04, 2020 4:50 pm
I was fortunate enough to snag an 11 1/2% mortgage when we bought a townhouse. By the time we closed, mortgage interest rates were 13 1/2%.

But, honestly, DW and I were both working at MegaCorp, and we didn't suffer much over all....
Similar to my story. DW and I closed on our new house with 11.75% mortgage in December, 1980. I'm not sure what the rates were then, but think probably about the same as you mention. I was in the right place at the right time with GM and getting yearly increases that just about kept up with inflation.
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Re: Was 1970s inflation a one-time thing?

Post by JonnyB » Sun Apr 05, 2020 12:41 pm

nisiprius wrote:
Sun Apr 05, 2020 11:00 am
That number is 2%, and the St. Louis Fed has given this explanation: Why the Fed Targets a 2 Percent Inflation Rate
And the answer is -- they just made it up. It is quite controversial. There are a lot of arguments why 2% is not the right number. And more arguments that targeting inflation at all is the wrong target.

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Re: Was 1970s inflation a one-time thing?

Post by White Coat Investor » Sun Apr 05, 2020 1:13 pm

willthrill81 wrote:
Sun Apr 05, 2020 10:53 am
White Coat Investor wrote:
Sun Apr 05, 2020 10:42 am
willthrill81 wrote:
Sun Apr 05, 2020 10:31 am
White Coat Investor wrote:
Sun Apr 05, 2020 1:37 am
ScubaHogg wrote:
Sun Mar 22, 2020 6:34 pm
William Bernstein in the “ages of the investor” series reviews several instances of inflation worldwide, in different circumstances, times and places. So I don’t think there is a reason to think it can’t happen again in the US (I’m not saying it will or won’t, just that I don’t see a reason it couldn’t theoretically happen).
I'm sure it'll happen again. But I do think the 1970s taught us how to fight it. Just keep raising those interest rates until people are willing to leave their money in the bank. 10%. 20%. 200%. Whatever it takes.
You have to be really careful with that though. Everyone leaving their money in the bank is a great way to encourage deflation, which would decimate borrowers and significantly damage the economy. It's a case of trying to find the approximate equilibrium point where the risk of tipping too far to one side (e.g. deflation) is much worse than tipping too far to the other (e.g. inflation).
So you're saying one should lower rates as inflation falls so you don't overshoot? I agree.
Precisely.

However, the link between low (high) interest rates and high (low) inflation is modest, at best.

From 1990-1999, cumulative inflation was 32%. From 2000-2009, it was 28%. From 2010-2019, it was 19%. That would imply that interest rates were highest from 2010-2019, but exactly the opposite was true.
I'm not talking about long term correlation. I'm talking about "what should we do right now if inflation goes to 8%?" The answer is: "Raise interest rates." If inflation keeps rising, keep raising rates.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Was 1970s inflation a one-time thing?

Post by squirm » Sun Apr 05, 2020 1:43 pm

Might want to read about Kondratiev cycles.

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Re: Was 1970s inflation a one-time thing?

Post by willthrill81 » Sun Apr 05, 2020 1:56 pm

White Coat Investor wrote:
Sun Apr 05, 2020 1:13 pm
willthrill81 wrote:
Sun Apr 05, 2020 10:53 am
White Coat Investor wrote:
Sun Apr 05, 2020 10:42 am
willthrill81 wrote:
Sun Apr 05, 2020 10:31 am
White Coat Investor wrote:
Sun Apr 05, 2020 1:37 am


I'm sure it'll happen again. But I do think the 1970s taught us how to fight it. Just keep raising those interest rates until people are willing to leave their money in the bank. 10%. 20%. 200%. Whatever it takes.
You have to be really careful with that though. Everyone leaving their money in the bank is a great way to encourage deflation, which would decimate borrowers and significantly damage the economy. It's a case of trying to find the approximate equilibrium point where the risk of tipping too far to one side (e.g. deflation) is much worse than tipping too far to the other (e.g. inflation).
So you're saying one should lower rates as inflation falls so you don't overshoot? I agree.
Precisely.

However, the link between low (high) interest rates and high (low) inflation is modest, at best.

From 1990-1999, cumulative inflation was 32%. From 2000-2009, it was 28%. From 2010-2019, it was 19%. That would imply that interest rates were highest from 2010-2019, but exactly the opposite was true.
I'm not talking about long term correlation. I'm talking about "what should we do right now if inflation goes to 8%?" The answer is: "Raise interest rates." If inflation keeps rising, keep raising rates.
That's probably the most logical thing for the Fed to do, especially since they don't have many other levers to pull that are likely to help. But my point was that the connection between interest rates and inflation is not as clear or strong as many believe. Some are concerned that if low interest rates aren't enough to stimulate inflation, as we've seen for the last decade, then high interest rates may not be enough to squelch inflation either. Perhaps the relationship is unidirectional, where high interest rates can arrest inflation but low interest rates are not sufficient to stimulate it. We just don't know. The Fed's job is very tough, and their tools are crude.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Was 1970s inflation a one-time thing?

Post by White Coat Investor » Sun Apr 05, 2020 2:00 pm

willthrill81 wrote:
Sun Apr 05, 2020 1:56 pm
White Coat Investor wrote:
Sun Apr 05, 2020 1:13 pm
willthrill81 wrote:
Sun Apr 05, 2020 10:53 am
White Coat Investor wrote:
Sun Apr 05, 2020 10:42 am
willthrill81 wrote:
Sun Apr 05, 2020 10:31 am


You have to be really careful with that though. Everyone leaving their money in the bank is a great way to encourage deflation, which would decimate borrowers and significantly damage the economy. It's a case of trying to find the approximate equilibrium point where the risk of tipping too far to one side (e.g. deflation) is much worse than tipping too far to the other (e.g. inflation).
So you're saying one should lower rates as inflation falls so you don't overshoot? I agree.
Precisely.

However, the link between low (high) interest rates and high (low) inflation is modest, at best.

From 1990-1999, cumulative inflation was 32%. From 2000-2009, it was 28%. From 2010-2019, it was 19%. That would imply that interest rates were highest from 2010-2019, but exactly the opposite was true.
I'm not talking about long term correlation. I'm talking about "what should we do right now if inflation goes to 8%?" The answer is: "Raise interest rates." If inflation keeps rising, keep raising rates.
That's probably the most logical thing for the Fed to do, especially since they don't have many other levers to pull that are likely to help. But my point was that the connection between interest rates and inflation is not as clear or strong as many believe. Some are concerned that if low interest rates aren't enough to stimulate inflation, as we've seen for the last decade, then high interest rates may not be enough to squelch inflation either. Perhaps the relationship is unidirectional, where high interest rates can arrest inflation but low interest rates are not sufficient to stimulate it. We just don't know. The Fed's job is very tough, and their tools are crude.
Crude but effective. Deflation? Lower rates and print more money. Inflation? Raise rates and print less money.

Sure, they might be sledge hammers but I think it's a weak argument to argue they don't work when used.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Was 1970s inflation a one-time thing?

Post by Turbo29 » Sun Apr 05, 2020 2:09 pm

White Coat Investor wrote:
Sun Apr 05, 2020 2:00 pm

Crude but effective. Deflation? Lower rates and print more money. Inflation? Raise rates and print less money.

Sure, they might be sledge hammers but I think it's a weak argument to argue they don't work when used.
I would argue that the second is more reliably effective than the first. It's much easier to move something by pulling on an attached string than by pushing on that string.
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Re: Was 1970s inflation a one-time thing?

Post by UpperNwGuy » Sun Apr 05, 2020 2:11 pm

What folk are calling 1970s era inflation actually began in the late 1960s during President Johnson’s second term. Google the numbers. It’s too simplistic to blame the inflation of that era on the gold standard change and the oil shortage. Also google the term misery index.

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Re: Was 1970s inflation a one-time thing?

Post by lostcoast » Sun Apr 05, 2020 2:26 pm

I probably don't have enough brain power to join this discussion but here are my 2 cents.
In 1980 I started a job which paid $18 an hour and by 1985 I was making $25 an hour. Fast forward to 2019 and that same job was still paying between $25 to $30 an hour.
I think one reason high inflation will not happen is the common backbone wage earner in this country has nothing left to include in raising costs. Their backs are against the wall with stagnate wages and rising costs already stretching them to the breaking point. Unless they are getting healthy raises and have security I just don't see how it could be supported.

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Re: Was 1970s inflation a one-time thing?

Post by willthrill81 » Sun Apr 05, 2020 2:27 pm

White Coat Investor wrote:
Sun Apr 05, 2020 2:00 pm
willthrill81 wrote:
Sun Apr 05, 2020 1:56 pm
White Coat Investor wrote:
Sun Apr 05, 2020 1:13 pm
willthrill81 wrote:
Sun Apr 05, 2020 10:53 am
White Coat Investor wrote:
Sun Apr 05, 2020 10:42 am


So you're saying one should lower rates as inflation falls so you don't overshoot? I agree.
Precisely.

However, the link between low (high) interest rates and high (low) inflation is modest, at best.

From 1990-1999, cumulative inflation was 32%. From 2000-2009, it was 28%. From 2010-2019, it was 19%. That would imply that interest rates were highest from 2010-2019, but exactly the opposite was true.
I'm not talking about long term correlation. I'm talking about "what should we do right now if inflation goes to 8%?" The answer is: "Raise interest rates." If inflation keeps rising, keep raising rates.
That's probably the most logical thing for the Fed to do, especially since they don't have many other levers to pull that are likely to help. But my point was that the connection between interest rates and inflation is not as clear or strong as many believe. Some are concerned that if low interest rates aren't enough to stimulate inflation, as we've seen for the last decade, then high interest rates may not be enough to squelch inflation either. Perhaps the relationship is unidirectional, where high interest rates can arrest inflation but low interest rates are not sufficient to stimulate it. We just don't know. The Fed's job is very tough, and their tools are crude.
Crude but effective. Deflation? Lower rates and print more money. Inflation? Raise rates and print less money.

Sure, they might be sledge hammers but I think it's a weak argument to argue they don't work when used.
A decade with a significantly increased money supply and extremely low inflation is hardly robust support for 'the Fed's tools work when used'. I hope that they will. But I'm skeptical.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Was 1970s inflation a one-time thing?

Post by Angst » Sun Apr 05, 2020 4:19 pm

nisiprius wrote:
Sun Apr 05, 2020 11:00 am
Just to be clear, the broad consensus is that inflation per se is not always or necessarily bad. The central bank's job is to print the right amount of money and use other policies in order to produce the right amount of inflation. For decades now, central banks have acknowledged inflation targets, and for nearly a decade the Fed has publicly disclosed their target number, instead of just a vague range. That number is 2%, and the St. Louis Fed has given this explanation: Why the Fed Targets a 2 Percent Inflation Rate
Thanks nisi for pointing this out (my emphasis above). I'll add that I think it's likely that sometime later this year the Fed will formalize a change in their thinking about this. There have been ongoing discussions in Fed circles about things like inflation "makeup strategies", "average-inflation-targeting", "flexible inflation averaging" and the "persistent undershooting of the inflation target" and I find it somewhat fascinating how tentatively they've danced around the idea as if it's such a significant departure from their current explicit 2% target. The Fed generally likes to do things slowly and deliberately though, without any surprises. I guess you can't blame them.

This recent Feb 2020 article (speech) presents it well: Monetary Policy Strategies and Tools When Inflation and Interest Rates Are Low
Fed Governor Lael Brainard wrote:Following several years when inflation has remained in the range of 1-1/2 to 2 percent, the Committee could target inflation outcomes in a range of 2 to 2-1/2 percent for a period to achieve inflation outcomes of 2 percent, on average, overall.
Once again, I don't mean to put too fine a point on it, but perhaps the Fed does! A bit of a distinction without a difference to me, but they don't want to ruffle any feathers out there.

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Re: Was 1970s inflation a one-time thing?

Post by GAAP » Sun Apr 05, 2020 4:56 pm

I could posit any number of potential causes for inflation -- especially using modern analogs to the oil supply. Precious metals that weren't even useful at the time, for example. Desperate attempts to buy land above a rising sea level, for another.

Are these likely? I have no clue, but I also have no doubt that something similar could occur, and that expecting inflation to never come back is probably optimistic. However, my current assumptions for the near term do not include runaway inflation.
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