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Is inflation “transitory?” Not if one looks at the historical pattern of inflation clusters.
From 1914 through 2021, there were eight times inflation, as measured by the BLS CPI, reached at least 4%. In six of those eight periods, inflation stayed above 4% for, on average, 3.9 years.
(Source: BLS, Inflation average 3.9%, median 3.5%, 1914-2021)
The graph above shows the yearly inflation rates since 1914, with the red, dashed line representing the average inflation rate. Each of the eight periods are color-coded to distinguish them. In two of the years, 1951 and 1984 (lime green diamonds), inflation did not persist. However, in each of the other periods, inflation lasted from three to 10 years.(Source: BLS, Inflation average 3.9%, median 3.5%, 1914-2021)
This may be a precursor. In 2021, inflation averaged 4.7%. If history is a guide, we will deal with high inflation for many more years.
This is not an oddity of math. Instead, in each of the six lengthy inflationary periods, there were fundamental reasons why inflation lingered.
The first two periods? Blame the usual suspects. War. 1916-1920, World War I, and 1941-1943, World War II. War is expensive. War is inflationary.
The third period (1946-1948) ushered in post-war expansion, the GI Bill, and a new belief that government spending was the best way to control the economy – the birth of Keynesianism for U.S. budget planners.
The fourth period (1968-1971) saw tight money, a sharp rise in interest rates, a slump in GDP, and eventually dropping the gold standard.
The fifth period (1973-1982) witnessed the Arab oil embargo, and further spikes in interest rates which led to an all-time high.
The sixth period (1988-1991) brought an economic revival with deficit spending, which tripled during President Ronald Reagan's term. Total public debt rose a staggering 40% over this brief period.
This leads us to 2021. If you sense a familiar pattern where massive government spending ignited persistently high inflation, then you are reading carefully.
It may even be worse because not only did public debt spike at a greater and faster rate in history – up $5.2 trillion in two years, but the economy was also virtually shuttered, which overwhelmed our means of production and the supply chain. More money plus less stuff equals inflation. This confluence caused an immediate spike in inflation and will take years to resolve.
Inflation clusters.
We are about to see it for the first time in 30 years.
Andy Martin is a fund manager and author of Dollarlogic: A Six-Day Plan to Achieving Higher Returns by Conquering Risk, foreword by Arthur B Laffer, Ph.D.
