Back in July, the White House Council of Economic Advisers (CAE) posted a thoughtful article on its blog titled Historical parallels of the current inflationary episode. The article analyzed six increases in inflation since World War II and argued convincingly that current events are nothing like the 1970s. On the contrary, the closest equivalent to inflation in 2021 is the first of these episodes, the price escalation that occurred between 1946 and 1948.
The consumer price index released last Wednesday was ugly; inflation is heating up considerably more than many of us anticipated. But this in no way contradicts the CEA analysis; on the contrary, the similarity to inflation in the immediate post-conflict years appears stronger than ever. What we experience now is much more like 1947 than 1979. And here’s what to know about that spike in inflation in 1946-1948: it was an isolated event, not the beginning of a protracted price and wage spiral. . And the biggest mistake politicians made in responding to this increase was not understanding its transitory nature: they continued to fight inflation even when it was no longer a problem, and in doing so they contributed to the recession of 1948. -1949.
As for this week’s CPI: it resembled the classic story of inflation caused by an overheated economy where there is too much money in search of too few goods. In early 2021, the price hike was narrowly based, driven largely by food, energy, used cars and services such as air travel, which were beginning to recover from the pandemic. Now that’s not so true: it appears that demand is outpacing supply in almost every sector of the economy.
One caveat in this story is that total demand in the United States does not actually seem that high; Real GDP, which is equivalent to real spending on goods and services produced in the United States, is still 2% below the economic capacity that would have been expected if the pandemic had not been unleashed. But it is a skewed demand, as consumers buy fewer services and more goods than before, putting pressure on ports, road transport, warehouses and more. These supply chain problems have been exacerbated by the global shortage of chips, coupled with the “Great Resignation”, the reluctance of many workers to return to their old jobs. That is why inflation is skyrocketing. On the bright side, jobs have rarely been so plentiful for those who want them. And contradicting the cliché, current inflation is not hurting the poor any more: wage increases have been especially rapid for the lowest-paid workers.
In other words, what can inflation from 1946-1948 teach us in 2021? Then as now there was a spike in consumer spending, as families rushed to purchase goods that had not been available during the war. Then as now, the economy took time to adjust to a big change in demand; in the 1940s, the shift from military needs to civilian ones. Then as now, the consequence was inflation, which in 1947 reached a maximum of close to 20%. And inflation didn’t stick to food and energy either; Wage increases in the manufacturing sector, which was much more representative of the economy as a whole in 1947 than today, peaked at 22%.
But inflation did not last. It did not end immediately: prices continued to rise rapidly for well over a year. However, throughout 1948 inflation plummeted and by 1949 it had turned into a brief deflation.
So what does history teach us about the current spike in inflation? One of the lessons is that brief episodes of overheating do not necessarily lead to stagflation like the one in the 1970s: 1946-1948 did not cause long-term inflation, and neither did other episodes that look more like the current one. like World War I and the Korean War. Considering what happened in the 1940s, assertions that inflation cannot be transitory because it has been going on for several months are simply absurd. Oh, and for what it’s worth, the debt market does indeed predict a temporary rise in inflation, not a permanent rise. The returns on inflation-protected bonds maturing in the next two years are strongly negative, suggesting that investors anticipate rapid price increases in the short term. But long-term market inflation expectations remain stable.
Another lesson that is extremely pertinent at this time is that a sudden increase in inflation is no reason to cancel long-term investment plans. The sharp rise in inflation in the 1940s was followed by an epic period of public investment in America’s future that included the construction of the Interstate Highway System. That investment did not reignite inflation; if anything, by improving US logistics, it probably helped keep it low. The same can be said for the Biden administration’s spending proposals, which would not boost demand much in the short term, but would help increase supply in the long term.
So, yes, the inflation data has been bad, and let’s hope the next reports are better. But those who make rash comparisons to the 1970s and shout to heaven for stagflation are looking at the wrong story. The correct one tells us not to panic.
Paul Krugman He is a Nobel Prize in Economics. © The New York Times, 2021. News Clips translation.
Sign in to continue reading
Just by having an account you can read this article, it’s free
Thanks for reading EL PAÍS