A great note from Nataxis on US inflation. Chill!
Historical Backdrop
In the post-WWII period, the United States has seen just a couple of problematic periods of significant inflation. The most recent of which was a 10-year period with two bursts of accelerating inflation in the 70s/80s. First, inflation quickly accelerated in 1973, before peaking and then quickly decelerating in 1975. Then for a short period, prices stabilized before reaccelerating in 1978. In the second wave, price growth peaked in the Summer of 1980, before decelerating throughout the 1980-1983 period. This decade was driven by a battery of factors including oil shocks from OPEC output cuts and outright embargoes, the dissolution of the post-WWII international monetary system and aggressive monetary policy (which included more than 900bps of rate cuts in two quarters, leading the dollar lower in the late 1970s), a large increase in military spending associated with the Vietnam War, strong legislation supporting the bargaining rights of unions and workers, robust antitrust enforcement, and other factors. Most of these dynamics are largely absent in today’s US economy which likely preclude a sustained pick up in inflation. Despite this, some economists and market participants have expressed concerns that massive budget deficits and money creation, reopenings, vaccinations and a widely anticipated growth surge will lead to a post-Covid jump in inflation. While we expect a modest cyclical increase in the months ahead, current inflation fears are overblown. The Federal Reserve has consistently undershot its inflation target for more than a decade. This experience is not unique to the United States. In the case of Japan, the BOJ has also missed its target for decades. Provided that inflation-expectations remain anchored, which appears to be the case, any increase in pricing power is likely to be temporary.
