Sunday, August 15, 2010
Mark Perry has an interesting post today on the "variability" of inflation over the past four decades, and how it was higher last year than it was in the wild and crazy inflation years of the 1970s. It reminded me of this chart which I put together many years ago, so I thought it worthwhile to update the chart and let readers compare it to Mark's charts and his commentary. What I'm measuring here are several things: each set of bars collects information on the CPI by decade; the red bars stretch between the high and low water mark for the year over year change in the CPI during each decade; the yellow line marks the average inflation for each decade; and the blue bars show the average plus or minus the standard deviation of inflation for each decade. My numbers are at odds with his, but that is probably because I'm measuring inflation over different time periods and using a different method (i.e., he uses a GARCH model, whereas I use a simply average ± one standard deviation). Note how extraordinarily volatile inflation was in the 1910s, 20s, 30s, and 40s, even though the average rate of inflation for those four decades was relatively low. Also note that deflation was not only present in the Depression, but also in the 1920s and early 1940s.
The main lesson I would draw from this chart (and from Mark's) is that U.S. inflation has been all over map: very high, very low, and at times quite volatile. There is no law written anywhere that says inflation in the U.S. must be low and relatively stable, because in fact it has rarely been low and stable. The 1960s and the 1990s stand out as the most tranquil periods for inflation in the past century, but even then inflation ranged from 1.5 to 6.2% in the 1990s, and from 0.7 to 6.1% in the 1960s.
Bottom line: the past offers little if any guidance for what inflation is likely to do in future years.
Posted by Scott Grannis at 9:25 PM