Sunday, August 15, 2010

A look at inflation over the past century

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.


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Frozen in the North said...


I think is far more persuasive than Mark's. Past inflation and its dispersion is meaningless with regards to future inflation! Fascinating analysis.

Honestly, my fear is stagflation, with emerging economies today accounting for 50% of oil demand (and growing at 20% p.a.) there is a real possibility here that G7 economies will suffer demand driven deflation, but input cost inflation. Really the worse outcome

Benjamin Cole said...

Great chart. Fascinating.

Right now, I fear inflation about as much as a fight with a half-eaten cream puff.

Deflation? Has me cowering in my boots.

Benjamin Cole said...

OT, but worthy perhaps of Grannis commentary, from Dow Jones:

WASHINGTON (Dow Jones)--China was a net seller of U.S. Treasurys for a second straight month in June, while overall inflows into long-term U.S. assets continued, the Treasury Department said Monday.

China's holdings fell $24 billion to $843.7 billion, though it remained the largest foreign holder of Treasurys. That followed net sales of $32.5 billion in May."

This I think is fascinating news.

It suggests that even though our largest creditor is no longer willing to increase its exposure to our debt, interest rates are still going down.

This, I suspect, reflects the chronic global capital glut. Due to savings rates in Europe, Japan, and the Far East, capital is abundant and will be for generations.

This should set up a long era of very low interest rates ahead. Very low--I suspect US Treasurys will offer small real negative yields.

At best, it should also set up a long boom in property and stock markets.

Militating against this rosy outlook is deflation, caused by too-tight money, and central bankers who think they are fighting inflation, and low interest rates.