Jump in U.S. inflation may signal that history is repeating itself

Are we watching an outbreak of inflation? An economist who witnessed inflation come out of nowhere in the 1960s sees many similarities. Maybe we should be holding onto our hats.

Economist who witnessed inflation come out of nowhere in 1960s sees similarities

Carpenters work on constructing new townhomes while building material supplies are in high demand, in Tampa, Fla., on May 5. In a rush to fill the demand, builders help to drive up the price of lumber and skilled wages, which might be part of a wider trend. (Octavio Jones/Reuters)

It suddenly seems that worrying about inflation has gone mainstream. What was so recently a quirky idea has shifted into a media mass movement as markets sag and news reports are filled with talk of rising prices.

Wednesday's latest consumer price index (CPI) data from the United States showing inflation rose to 4.2 per cent instead of the expected — though already high — 3.6 per cent only added to the apprehension.

For Canadians thinking this is a U.S. phenomenon that we can safely ignore, don't count on it. If inflation really does kick in, price rises in a deeply entangled North American economy will not be stopped by a thin border. If we're not there yet, we are likely to catch up.

The reason for that "if" in the previous paragraph is that one or two sharp rises in inflation do not necessarily signal an inflationary trend. On the other hand, nearly three generations of North Americans who have never witnessed true inflation in their adult lives have few reference points to decide for themselves if what we are seeing really is the beginning of inflation. 

Learning from experience

One way to help rectify that is to find someone, maybe a grandparent, who witnessed the onset of serious inflation in the 1970s and 1980s. In lieu of a handy grandparent, I tracked down 82-year-old David Laidler, professor emeritus at Western University in London, Ont., who in the 1960s was an early expert on the subject and says he is worried that history may be repeating itself.

But before making Laidler's case, it is probably a good idea to explain why Wednesday's U.S. inflation figures, while worse than expected, may not be as astounding as they appear. It is also important to remember that there are many smart economists, including those at our central banks, who insist this is a blip, not a trend.

For one thing, the inflation numbers getting all of the attention include volatile food and fuel prices. Central banks use a measure of inflation with the volatile parts taken out, called core inflation. Core remains under two per cent. Also, those current year-on-year numbers are a comparison of recent prices with those that were unusually low a year ago due to pandemic shock.

Earlier this week, as markets had already begun trembling in anticipation of Wednesday's inflation data, senior U.S. Federal Reserve official Lael Brainard repeated the central bankers' assertion that inflation is just surging temporarily as the economy goes from full stop to full throttle.

Lael Brainard, a senior U.S. Federal Reserve Board official, said this week that price rises are temporary and that cutting stimulus to stop inflation would hurt the recovery. (Brian Snyder/Reuters)

"Remaining patient through the transitory surge associated with reopening will help ensure that the underlying economic momentum that will be needed to reach our goals ... is not curtailed by a premature tightening," Brainard said in a speech on Tuesday.

It appeared that markets were not listening. One of the reasons may be that CPI is not the only inflation indicator being bandied about this week. Another is something called the five-year breakeven rate, a comparison of government-issued zero inflation bonds to other five-year bonds.

A glance at the above link will show the market expects a sharply rising inflationary trend.

Almost everyone you talk to says they have noticed things getting more expensive. Business leaders, including the Oracle of Omaha, Warren Buffett, say their costs are rising, and the companies they control have begun to increase prices to compensate.

Ringside seat

And according to economist David Laidler, that's exactly how inflation started last time around in the late 1960s and '70s.

"Let me be clear, I wrote my first article that had to do with the theory of inflation in 1965, so I was there at the beginning," the economist quipped in a phone interview.

Earning his PhD with Nobel Prize-winning economist Milton Friedman at the University of Chicago, Laidler had a ringside seat watching price rises eat away at the value of money over the next 20 years as inflation rose to the high teens.

David Laidler, professor emeritus at Western University in London, Ont., was an early expert on inflation and says he's worried that history may be repeating itself. The economist wrote his first article on the theory of inflation in 1965. (Western University)

Laidler says that most people, including central bankers, were caught by surprise.

"You get prices of particular inputs going up, and everything gets put down to special, local instances," he said.

But Laidler says those special, localized cases were actually symptoms of a broader cascade of effects spread through prices and wages.

"What's happening is demand is beginning to percolate through goods markets.... The goods producers start trying to increase output and they need more inputs for that, and they begin to run into bottlenecks," he said. "And then the prices go up there and then the guy who's selling to consumers says, 'Well, gee, I have to raise my price because my input prices have gone up.'"

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Laidler says when you look at prices of things such as lumber and steel and copper — and when you see the shortage of workers with the right skills — it is credible to imagine the same thing is happening all over again.

"And if what happened in the late '60s and early '70s happens again, the authorities are going to say, 'Oh, this is a temporary thing, we don't have to worry about it.'"

He says that could allow inflation expectations to get embedded, making it a "real pain in the neck" to muster the political will to stop it.

Laidler says while rising house prices are not considered inflation because they are assets, not consumer goods, they have in the past been an indicator of coming inflation. But he says if you think we are entering a period of inflation, this is the time to buy real goods such as cars, appliances — things that will last but could become more expensive in the future.

Saint-Tropez in your future? If you think inflation is coming, it may be time to spend on durable goods or a nice holiday once COVID-19 restrictions end. (Eric Gaillard/Reuters)

He remembers someone asking him back in the 1970s what to do with their money, and he recalls offering only slightly tongue-in-cheek advice that they should spend it on a good holiday because at least they will have their memories.

And while Laidler is pleased to share his own memories of an earlier era of inflation, he adds this proviso that clearly does not just apply to him:

"Anyone who says they really know what is going to happen over the next couple of years without a doubt is not to be trusted."

Follow Don Pittis on Twitter @don_pittis