Inflation surges in perspective

 

This week’s FOMC statement and Chair Powell’s press conference rightly stressed the progress that has been made in controlling inflation, and the U.S. does seems to be past the peak of the inflation surge of 2021-2022. Powell was correct, however, in stating that it is too early to claim victory. To offer some perspective, this post looks at other inflation surges over the past 50 years.

Figure 1 shows U.S. inflation over the period 1960 to 2022 as measured by the percent year-over-year change in three different price indices: the consumer price index (CPI), the personal consumption index, the personal consumption index (PCEPI) less food and energy prices (PCEPILFE), and a measure of the prices of sticky goods and services prices constructed by the Federal Reserve Rank of Atlanta (it also excludes food and energy prices). All data is obtained from the St. Louis Federal Reserve Bank’s FRED database. https://fred.stlouisfed.org/.

The figure suggests four inflation-surge episodes, three of which occurred between the late 1960s and the early 1980s, a period that encompasses the Great Inflation. The first two surges were quickly followed by another and larger upward surge in inflation. After the third surge, which peaked in June 1980, CPI and Sticky CPI inflation started rising again, reaching a second peak in Sept. 1981, but thereafter all four inflation measures continued to fall as the economy entered the period of the Great Moderation.  

The fourth surge in inflation that stands out is the one in 2021-2022. 

The second figure isolates the four inflation surges. The mid-1970s and late 1970s cases (in the upper right and lower left panels) are the most interesting from today's perspective. Both were associate with oil shocks. In both cases, CPI inflation, which includes food and energy prices, dropped relatively quickly. In the case shown in the upper right panel, inflation fell, but not back to its starting level, before rising again, leading into the inflation surge seen in the lower left panel. 

The question now is whether the current inflation surge, seen in the lower right, will follow the pattern of the early 1980s, with inflation eventually stabilizing around a low level, or whether it might be 1976 again, with only a temporary decline, followed by an uptick in inflation. And even if there is no uptick, will it decline to rates similar to when the surge started, as with the first surge in 1970 (upper left panel), stabilize at the Fed's 2% target, or halt at a higher rate, perhaps around 4% as some have advocated?  

In his opening remarks at the press conference following the FOMC meeting February 2, 2023, Chair Powell stated that, in the fight to bring inflation down, the Fed has "...covered a lot of ground, and the full effects of our rapid tightening so far are yet to be felt. Even so, we have more work to do. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy." Inflation over the next year will depend critically on the credibility of that statement.

As a sidenote, the Sticky Price CPI index doesn't look very sticky. Despite the fact it is meant to measure the prices of good and services that do not change frequently, and excludes food and energy prices, it is only in the recent episode that it lagged appreciably behind the other measures as inflation initially rose. It also has not yet peaked (as of January 2023).