How bad is this period of high inflation?
Posted on December 23, 2022
I was surprised: this period of inflation (so far) PALES in comparison to periods of high inflation that all of us retirees have lived through. I look at two slices of what one might consider as high inflation: we currently have experienced 19-months with inflation greater than 4%; this compares to the longest period of more than 11 years and three periods since 1959 that have totaled 17 years. The current period of inflation greater than 6% ran for 10 months ; this compares with a past a period that lasted longer than 8 years.
I previously wrote about inflation about 18 months ago when we first crossed 12-month inflation greater than 4%. This post is similar, but I think it is a clearer comparison to history.
== I use PCE from 1959 ==
I can download data from the St Louis Federal Reserve site for many indices of inflation. I chose the index for Personal Consumption Expenditures (PCE). The Federal Reserve Board favors this measure of inflation. This data series starts in 1959, and inflation has averaged 3.2% per year for the last 63 years. (The average for the last 100 years is just under 3%.)
== I’ll look at > 4% and > 6% ==
The Federal Reserve today has a target of 2% annual inflation. I think anything above 2% inflation is considered as high. I’ll look at two slices as obviously high: 12-month inflation > 4% and > 6%.
== The current period ==
Data for inflation for November was issued today. We get an accurate view of the most recent trends:
• May 2021 was the first month of 12-month inflation greater than 4%, more than 30 years from the last time that happened. The current run from May 2021 is 19 months.
• January 2022 marked the first month of 12-month inflation greater than 6% inflation, more than 39 years from the last time that happened. Data for November was issued today: a 10-month run >6% ended in October. I think we have put inflation > 6% behind us.
How long will the current run of > 4% inflation last? That depends on inflation in future months. Inflation for the last five months averages to 2.4% annual rate; the rate for November is at an annual rate less than 2%. If I assume a rate 40% greater than the average of the last five months, our last month of inflation > 4% will be in April. That would mean we will have experienced two years of 12-month inflation > 4%.
The Fed looks at a slightly different measure over the short term, the PCE less volative food and energy components. Inflation over the last five months averages 3.5% and not 2.4%. The rate of inflation for the last two months is less than the measure that includes Food and Energy.
== History of inflation > 4%? ==
The broad-brush view is that we can compare our current period of 19 months with inflation greater than 4% to a total of 17 years in the past with inflation greater than 4% per year! WOW! I certainly don’t remember all that. If April is out last month >4%, this period will be shorter than any other similar period.
== History of inflation > 6% ==
We can compare the current period of 10 months to the ~8½ year, hyper-inflation period that starting in 1973. Double WOW! WOW! I’ve lived through – you’ve lived through – more than nine years of inflation > 6%!
Conclusion: Our current period of high inflation – > 4% for the 12-month inflation rate – started in May 2021. That’s 19 months so far, and recent inflation rates suggest we might drop below the 4% rate in May. This would be the shortest of three past periods and far shorter than the longest period which lasted over 11 years.
Our current period contains ten months of > 6% inflation which ended in October. The ten months compares to a staggering past period lasting longer than eight years.