Stock Groups

The current inflation run is similar to other episodes in history, but with important differences

[ad_1]

On Thursday, November 11, 2021, groceries of a customer are picked up in a San Francisco store.

Getty Images| Bloomberg | Getty Images

The critical supply chain is strained. The demand rises. Inflation is a major concern. Prices rise and people start to panic about it.

It is 1945 or 1946? 1916? 1974?

Answer: All of the above. You can also throw in 2021.

For the United States, inflation is nothing new. The country has already experienced seven episodes of sustained price rises since World War II. the strongest in 30 years. The world’s biggest economy has had a tough time getting out from the pandemic shock., Inflation has also been a side effect.

But trying to find a historical parallel – and, thus, perhaps a way out – isn’t easy. While almost every cycle has some similarities to other cycles, each one is distinct in its own right.

The most common comparison to these days is the stagflation – low growth, high prices – environment of the 1970s and early ’80s. While this may have some truth, it is not the only way to see things.

It’s almost touching everyone, according to the extent of inflation. It is widespread or greater than we experienced in the 1970s,” stated Peter Boockvar chief investment officer of Bleakley Advisory Group. It is not clear how much it will continue rising, when it will slow down or at what pace it will settle.

The connection between 1970s and the United States is detested by the majority of U.S. policymakers.

Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen are some of the leaders, as well as Biden Administration officials view inflation as temporaryThe pandemic is almost entirely responsible for this. After these factors recede, inflation will begin to drift lower and eventually reach the Fed’s 2% mark, which is indicative of a growing, healthy economy.

White House economists assert that the current stretch doesn’t look like the stagflation era but is more like the immediate post-1942 climate. This was when price controls and supply problems combined with extraordinary demand generated double-digit inflation gains which didn’t slow down until late 1940s.


Inflation episodes in the United States

Percentage change in consumer price index from last year

Notice: Inflation spikes are highlighted.

Source: Bureau of Labor Statistics (CPI), White House (inflationary periods through ‘08). The following data is available:

seasonally adjusted and as of Oct. ’21.

Inflation episodes in the United States

The Consumer price index, percent changes from

One year ago

Economic expansion in the 1960s

Notice: Inflation spikes are highlighted.

Source: Bureau of Labor Statistics, White

House (inflationary periods through ‘08).

Data is seasonally adjusted and as of Oct. ’21.

Inflation episodes in the United States

Percentage change in consumer price index from last year

Notice: Inflation spikes are highlighted.

Source: Bureau of Labor Statistics, White House (inflationary period through

‘08). Data is seasonally adjusted and as of Oct. ’21.

“Today’s shortage of durable goods is similar — a national crisis necessitated disrupting normal production processes,” a team of White House economists wrote in a July 2021 paper. Instead of redirecting resources for a war effort however, manufacturing capacities were temporarily shut down to prevent COVID contagion.

Once the supply chain disruptions are remedied – and there are signs that at least the major ports are becoming less crowded in recent days – “inflation could quickly decline once supply chains are fully online and pent-up demand levels off,” the paper stated.

Temporary, permanent, or “in between”

On November 22nd, 2021, a customer fills up her car with gas at a Miami gas station.

Getty Images| Getty Images

The debate has always been framed in terms of black and white. Jim Paulsen is chief investment strategist for the Leuthold Group.

Paulsen, in fact, has been studying inflation over the past 100 years and has found two instances where it is not as problematic. These are after World War I, and the 1970s-early 1980s.

The majority of his run is in the camp. It will also pass, as it has been fuelled largely by. supply chain problemsThis will eventually resolve.

But he is wary of getting it wrong.

Paulsen stated that while it may not be as short-term as initially thought, he believes that the odds are good that the storm will end in the next few months. But I would also add that it is the most likely to fail. If it isn’t, it will be a disaster not just for stocks, but for the entire economy.

Inflation is a result of this unique cycle in an important way. Policymakers have never given the economy anything even close to that amount.

Imagine if we declared pseudo-victory against Covid next year, and also declare victory over inflation.

Jim Paulsen

Chief investment strategist at the Leuthold Group

“Abuse of Policy”

Still, he also sees declining commodity prices – with oil at the center – as well as falling shipping costs and the lessening of clogs at the ports as hopeful signs that inflation will, at least in historical terms, prove temporary.

“What if, next year, we don’t just declare pseudo-victory against Covid but also declare it over inflation?” Paulsen said.

Both questions are complicated by the emergence in South Africa of a new Covid version. Even Powell, Bush and others in the inflation-is-transitory camp say that the pandemic has been the root cause of price pressures, so if the new variant turns into a larger threat, that means inflation stays higher for longer.

The majority of mainstream economists believe there will be a substantial drop in inflation by 2022.

It all comes to an end.

Mark Zandi is the Moody’s Analytics chief economist. He feels the same way, even though there are many parallels to the present predicament with the runaway inflation in the 1970s.

He stated that the inflation shock waves were demand driven and the result of oil embargoes. Wage-price inflation was also lifted by unions who were able negotiate increases in cost of living through contracts.

Sensible Fed contributed also to problems, as it took inflation too lightly and refused interest rate rises that could slow down the economy.

Although Fed policymakers were slow to tighten the current day, they promised that they will act in response to inflation expectations. But, it is possible that the Fed has already made too many mistakes.

“The COLAs were responsible for the rise in inflation expectations and the wage spiral.” Zandi stated that they did increase, but the Fed didn’t recognize it and didn’t respond. “Assuming that each wave of the virus in future waves is less disruptive, then I believe we will see signs and moderated.”

[ad_2]