The Last 35-Year History Of Inflation-A Deeper Look
In yesterday's article for TalkMarkets, I showed my readership a graph that plotted the history of U.S. inflation over the period of the last 101-years. From that graph, it was easy to see how the last 101-years of the U.S. economy could be segregated into four distinct U.S. economic periods. The following table shows; (1) those periods again; (2) the length of time covered by each period; (3) the average “annual” change in inflation (measured by the CPI) during the period; and (4) the statistical variation (standard deviation) of the changes.
Time Period |
Economic Description |
Years Covered |
Average Change in CPI |
Standard Deviation |
1916-1951 |
The Crazy World Period |
36 |
5.74% |
5.25% |
1952-1967 |
A Good U.S. Period |
16 |
1.99% |
1.77% |
1968-1981 |
A Not so Good U.S. Period |
14 |
7.45% |
3.10% |
1982-2016 |
A Very Good U.S. Period |
35 |
2.85% |
1.29% |
From the above table it is worth taking away two very important points:
(1) The two periods with the lowest average change in the CPI (1952-1967 and 1982-2016) also showed the least variance—meaning that annual change in inflation was more steady and fluctuated less from the average inflation for these periods.
(2) The most recent of the good periods for the U.S. (1982-2016) has lasted more than twice as long as the earlier good period for the U.S.—35-years compared to 16-years.
In my previous article, I claimed that the first three periods shown above are interesting to look at, but that none of them have any bearing on the current period in which we are living. I said the current period reflects a “new world economy”, one that did not exist during the earlier periods and reflects an economy driven by “unparalleled technological advances”, “significant productivity enhancements”, and “globalization”—all of which I claim were lead by the United States of America.
Now considering the above, I thought it would be worthwhile to break down the last period even further for my readers. The following graph does that:
Wow! It seems that this most recent economic period could be broken down even further into two additional sub-periods: (1) 1982-1990; and (2) 1991-2016. So why don’t we look at these periods in more detail, in the same manner as we did above, using the following table to see what we can derive:
Time Period |
Economic Description |
Years Covered |
Average Change in CPI |
Standard Deviation |
1982-1990 |
A Good U.S. Period |
9 |
4.12% |
1.26% |
1991-2016 |
A Very, Very Good U.S. Period |
26 |
2.40% |
0.98% |
Again, take note that the latest of the above sub-periods not only had a significantly lower average change in inflation than the earlier sub-period, the variance was lower for this sub-period, too. Not only that, this last sub-period has lasted almost three times as long as the earlier, pretty good, sub-period. And maybe even the biggest point of all, note that inflation stayed both "low and steady" throughout this period in which the wars in Afghanistan and Iraq took place and we experienced the Greatest Recession Since the Great Depression. That is unheard of from the perspective of prior history.
What is going on here, Jim?
Some financial and economic gurus, including those at the Federal Reserve, would like you to believe that these latest good times with "low inflation" are a result of “smarter decision making”, “wiser monetary policy setting”, and/or simply “good luck”.
Baloney! In fact, it is just the opposite. Finance and economics has nothing to do with the above. After all, it was poor finance (i.e., banks, Fannie, and Freddie) and poor economics (the Federal Reserve) that caused the Greatest Recession Since the Great Depression, which by the way if you don’t know it already, has been over for several years now. Inflation stayed low because businesses, both here and abroad, never quit producing throughout the period while the financiers cleaned up their mess at the cost of the people they were supposed to be serving.
Instead, here are the real reasons the data above spiels out the way it does above:
(1) An unparalleled technological revolution coming mostly out of the U.S.--personal computers, advanced chip technology, robotics, etc. that really began in the 1980s and blossomed into adulthood in the early 1990s and continues today;
(2) The internet revolution—again something that came out of the U.S., began in the early 1990s and continues to blossom today;
(3) The end of the Cold War in the late 1980s, resulting in a shift more towards “butter” than “guns” in the proportion of the U.S. economy dedicated to these two alternatives; and
(4) Increased Globalization where material products are being produced more cost-effectively than in the past.
And whether you like it or not, which as an American citizen I believe you should, nothing is going to change the above. This train called the “new economy”, whose conductor has been the United States of America, first left the station nearly 35-years ago and it has made several annual trips around the globe in the meantime.
We have learned a lot in our recent journeys and this is not the time to build walls to slow the train in its tracks. Instead, be proud of your accomplishments America and do not fear to keep your engines stoked with your investments in technology, education, the environment, freedom, and dreams--those investments are and will continue to make you great--not bombastic sophistry and isolationism.
Enough said. In my next article we will begin to look at how long it took our "wisest economists" (i.e., the Federal Reserve) to recognize this new economy by looking at long term, "risk-free", interest rates plotted against this long term inflation history. I believe you will find it quite interesting.
Disclosure: No positions.
While the new normal/globalization hollowed out the heartland, the alternative to free trade could hollow out the tech regions. Trump has to decide if he wants a strong dollar, so tariffs won't hurt imports that much, while providing revenue to the government, or a weak dollar so exports will be desirable. He cannot have both although I am sure he wants both a strong and weak dollar. Enough to make an unstable POTUS go crazy.