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This chart puts the past 100 years of inflation into a context you've unlikely seen before. The message of this chart is that the "best" days of inflation are in the past. By best, I mean the times when inflation was low and relatively stable. The best decade, as shown in this chart, was the 1990s, with the second-best being the 1960s. The current decade is only the fourth-best.
(Note: the red bars mark the range between the highest and lowest level of year-over-inflation in each decade, as measured by the CPI. The yellow line represents the average level of year-over-year inflation in each decade. The blue bars represent the average plus or minus one standard deviation. Smaller red and blue bars correspond to less-volatile inflation conditions.)
The volatility of inflation has picked up in the past decade, even though the average level of inflation has been relatively low (2.6%). This volatility was driven apparently by extremely volatile energy prices, but energy price volatility arguably was driven by erratic monetary policy. The Fed can (and usually does) blame unwanted or volatile inflation on external factors beyond their control, but ultimately the Fed bears the responsibility for the level and variability of inflation.
5 comments:
Mr. Grannis.
“The Fed can (and usually does) blame unwanted or volatile inflation on external factors beyond their control, but ultimately the Fed bears the responsibility for the level and variability of inflation.”
Of course they do. They know very well its Demand Pull Inflation yet somehow they can’t bring themselves to take the blame.
In the 1970’s many explained inflation as Cost Push. However, Friedman argued correctly that Cost Push is a short term inflation determinant but Demand Pull is the overriding inflation driver.
Speaking of inflation, the wonderful mid-to-late 1970’s was Inflation Central. This period in history was before bar code pricing. Prices were still stamped onto the products with small stickers.
Inflation was so wide-open, you would go into a store and find a product that had been re-priced so many times that the price stickers were four and five deep. It was a hobby as well as a shock to peel back the price stickers and see what the prices had been in the recent past as well as originally. It was unbelievable how quickly prices increased.
Demand Pull inflation is dizzying.
I was fortunate to witness first-hand what hyperinflation was like, during a trip to Argentina in the mid-1980s. The stores had blackboards on each aisle, and prices were changed frequently during the day. In one three-week period, the price level rose 250% (not annualized).
Mr. Grannis:
Love the blackboard pricing story, with each isle with its own blackboard, and prices changing hourly/daily. That’s classic!
Tell you what, when inflation returns, you know, that funny vibration/sound you can hear coming from the economic railroad tracks…....we can collaborate on the “catch phrase” for the new Inflation phenomena: Sticky Blackboard Inflation.
Can you do a similar chart for the 1800s? I have read that inflation was relatively low and less volatile. For most (or all?) of the century, private banks issued their own money. I guess competition was a very good regulator.
Unfortunately, the Feds started piling more and more regulation upon the banks' issuing of money, and, as they say, the rest is history.
Greg: I don't have the inflation data for the 1800s handy.
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