Part 1 of this article raised issues with the “Great Inflation” narrative as recalled by several experts. Various problems exist with trying to understand just how bad the price increases were 50 years ago, whether statistical or anecdotal evidence are used. Despite several issues, the point of contention is the idea of the Fed being responsible for resolving (price) inflation of the 70’s.
The first chart is the Consumer Price Index (CPI), not seasonally adjusted since 1913. Over a hundred years later the index has increased by nearly 3,000%.
Save for a few minor blips, the CPI has never decreased and the 1970’s looks little different than all the decades following.
Using seasonally adjusted data for the same CPI but on a shorter time frame shows similar results:
To be certain, observe the same seasonally adjusted data again but from 1960 to 1990:
The victory over inflation can hardly be celebrated because prices only increased after the 70’s.
Perhaps that’s why the annual percentage change in the CPI from the prior year, instead of the CPI level itself, stands as the best argument in support of a Fed victory:
The CPI percentage change had an upward trajectory throughout the 70’s until it topped in 1980, after which a downward trajectory ensued ever since. In 1980 the annual percentage change was 14%, then in 1981 it was “only” 10%, then “only” 6%, followed by 3% in 1983. Even though the percentages decreased, the compounding effect fell by the wayside on our central planners, and is seldom, if ever noted. This “compounding inflation,” is the reason the CPI only ever increases.
The only way inflation could be defeated would be if periods of “negative inflation” existed. Unfortunately, this rare occurrence has only been for negligible amounts. It’s fair to say anyone alive today has only experienced perpetual price increases their entire lives.
The last chart brings together the CPI percentage change from the prior year (green) as well as the effective federal funds rate (blue):
The idea that Fed rate hikes should take credit for the changes to CPI is revealed as an untenable position to hold. If we looked at the correlation coefficient between the two sets of data (+0.76) and concluded interest rates dictate inflation, this would be faulty as we could also conclude inflation dictates interest rates, having the same minimal level of proof to substantiate our claim. In either case, causation between the two cannot be found; so the Fed’s credit remains undeserved.
To negate this, insisting the Fed dictated the CPI leads to an absurdity, especially when observing long-term trends. It was the Fed who raised rates from the 50’s until the start of the 80’s. The CPI percentage change was also upward trending, so we’d have to conclude it was this raising of rates for three decades which caused inflation to increase! Conversely, CPI’s percentage change began its downward trajectory once rates peaked. We’d also have to conclude it was the Fed who continually fought inflation since the 80’s through low rates…
Contrary to the narrative, the Great Inflation of the 70’s was never won. There has never been a “great deflation,” nor any deflation for that matter. Prices in 1982 were higher than prices in 1981, which were higher than 1980, and so forth. How it can be said the Fed fought price increases (when prices have only increased while the dollar’s purchasing power only decreased throughout the 80’s just like they have since inception of the Fed) is anyone’s guess. To claim a victory against 1970’s inflation sounds foolish at best, deceptive at worst.
Understanding the Fed never really solved a price inflation problem from the 70’s allows us to reconsider economic history, as well as allows us to anticipate what might be in store for our future. Time will tell. But if large price increases are on the horizon, whether sooner or years down the road, be prepared. Our central planners might look to raise interest rates until the CPI becomes manageable, according to them. The proof would be that everyone knows the Fed has tools to control inflation and it worked in the 70’s. But we know this to be false. When we’re talking about the Federal Reserve, the proof is in the platitude.
Of course, any significant rate hike seems unfathomable given current debt levels. But that’s a story for another day...
