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

The critical supply chain is strained. Inflation is soaring. The prices rise, and everybody starts to worry about inflation.

It is 1945 or 1946? 1916? 1974?

There is no answer to the question, but you could also add 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., And inflation is a very unpleasant 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. Although this is true, reality can be more complex.

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. The question here is: “How long does this continue to rise, when will it slow down and how quickly can it settle?”

Most U.S. officials reject the connection to 1970s.

Federal Reserve Chairman Jerome Powell, Treasury secretary Janet Yellen, and Biden administration officials are just a few of the many leaders. view inflation as temporaryThe pandemic is almost entirely responsible for this. When these conditions subside, the Fed sees inflation falling, and eventually reaching the 2% threshold that is considered to be a sign of a healthy, growing economy.

White House economists claim that this stretch is not similar to the stagflation period, but rather the immediate post-World War II environment, where price controls, supply issues, and exceptional demand drove double-digit inflation gains, which didn’t stop until the 1940s.

“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. To avoid the spread of COVID, instead of redirecting funds to support war efforts, production capabilities were temporarily halted or reduced.

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.

The idea that inflation is “transitory” – a well-worn term that is transitioning out of vogue – is central to the insistence from fiscal and monetary authorities that excessively easy policy is not to blame for the inflation surge.

But, simple policy was at the heart of previous cycles. Trying to pin everything on the pandemic didn’t go over well with consumers. confidence is running at decade lowsWall Street where Wall Street investors worry about the future of inflation.

The biggest question in investment circles right now is whether inflation is permanent.

“The argument is often presented in binary terms. Jim Paulsen (chief investment strategist, Leuthold Group) stated that the reality is it’s likely in between.”

Paulsen, in fact, has been studying inflation for over a century. He found that, while it may have become problematic at times, it only lasted after World War I, as well as the 1970s-early 1980s.

The majority of his run is in the camp. It will also pass, as it was fueled by. supply chain problemsThis will eventually resolve.

He isn’t afraid to be wrong.

Paulsen explained that although it is not temporary, “I still believe that that there are the best chances” that it will be over in the next months. But I would also add that it is the most likely to fail. It’s possible for stock prices to plummet, but it could also be catastrophic for the economy.

This cycle presents a unique inflation risk because policymakers have never spent this much money on the economy.

Although President Joe Biden, Yellen and others insist that inflation isn’t caused by all fiscal stimulus, some find it difficult to accept the fact that almost $10 trillion has been spent on monetary and fiscal stimulus.

Paulsen is positive that the current conditions will improve by 2022. However, he fears about “global coordinated abuse of policy.” The meaning of this is, in essence: policymakers are still in an emergency position for an economic picture that seems long past crisis stageOfficials should keep up the heat to avoid boiling,

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 we declared pseudo-victory over Covid next year, and also declare victory 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.

Mark Zandi (chief economist at Moody’s Analytics) feels this way, even though he believes there are similarities between today’s predicament to 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.

Even though the Fed has been slow in tightening its belt, policymakers still have the promise that they will act when inflation expectations are unfounded. However, the Fed may be too late.

The COLAs, and inflation expectations that were high, caused the wage spiral we experienced back in the 1980s. Zandi explained that the Fed failed to recognize this and didn’t respond. If each subsequent wave of virus disruption is smaller, then yes, we’d see signs of moderation.”