Once and Future Inflation

Episode Summary

Executive Summary: The podcast offers a historical tour of U.S. inflation from the pre-Fed era to the pandemic, arguing that inflation is shaped by central banking, gold standard constraints, wars, expectations, supply shocks, and productivity. The hosts conclude today’s surge is likely transitory because expectations remain anchored and pandemic-driven bottlenecks should fade, though they stress humility given inflation’s complexity.

Main Topics: U.S. inflation history by era (Priority: 5/5): The hosts organize inflation into six eras: pre-Fed volatility, Depression deflation, wartime inflation, Great Inflation, Great Moderation, and post-financial-crisis low inflation, using each to draw lessons about inflation dynamics. Deflation during the Great Depression (Priority: 5/5): They explain why falling prices are dangerous: deflation discourages spending and investment, worsens debt burdens, increases defaults, and deepens economic collapse; leaving the gold standard helped end deflation. Great Inflation and the role of expectations (Priority: 5/5): The discussion links the 1960s-80s inflation surge to fiscal expansion, oil shocks, weak Fed reaction, and rising inflation expectations, which ultimately required Volcker-style rate hikes to reverse. Great Moderation and structural disinflation (Priority: 4/5): They attribute low inflation from the 1990s to 2010 to technology, globalization, trade liberalization, and deregulation, while noting measurement issues and quality-adjustment challenges. Inflation targeting and the 2% goal (Priority: 4/5): The hosts defend a positive inflation target around 2% as a buffer against deflation and to preserve policy room in recessions, and discuss the Fed’s shift toward averaging inflation over time. Current inflation and whether it is transitory (Priority: 5/5): They argue the pandemic-era inflation spike is likely temporary because it stems from supply shocks and bottlenecks rather than entrenched expectations; they expect inflation to ease as supply chains normalize. Fiscal stimulus and inflation debate (Priority: 3/5): They consider but downplay claims that pandemic fiscal aid caused the inflation surge, arguing the timing and mechanics make the effect limited relative to supply-chain and labor-market disruptions.

Key Arguments: Inflation before the Federal Reserve was highly volatile because there was no strong monetary anchor; central banking improved stability. Deflation is more dangerous than mild inflation because it creates a self-reinforcing cycle of delayed spending, debt stress, and defaults. The gold standard constrained policy during the Depression; leaving it helped reflate the economy. The Great Inflation showed that once inflation expectations rise, it becomes much harder and costlier to bring inflation down. Volcker’s aggressive rate hikes were necessary to break entrenched inflation and expectations. The Great Moderation reflected positive supply shocks from technology, globalization, and possibly deregulation, which lowered goods prices and inflation. A 2% inflation target gives central banks room to cut rates in downturns and keeps the economy away from deflation. Current inflation is largely a pandemic supply-shock story; expectations remain anchored, so it should fade rather than persist. Fiscal stimulus likely amplified demand and supply strains somewhat, but it is not the primary cause of current inflation. Measurement of inflation is difficult during rapid technological change because quality improvements can distort price comparisons.

Data Points: CPI inflation: 6%+ year over year - Referenced as the recent inflation spike prompting concern Peak CPI inflation in early 1980s: close to 15% - Used to illustrate the severity of the Great Inflation era Federal Reserve founding: 1913 - Marked as the transition from pre-Fed volatility to modern central banking Great Inflation period: mid-1960s to late 1980s/early 1990s - The era when inflation accelerated and later normalized Great Moderation period: 1990 to 2010 - Described as a time of strong growth and low, stable inflation Timeframe of pandemic fiscal support: about $5 trillion - Total fiscal support cited from the CARES Act through the American Rescue Plan Fiscal support as share of GDP: 25% of GDP - Used to frame the scale of pandemic-era stimulus Oil embargoes: 1973 and 1980 - Cited as major supply shocks during the Great Inflation Inflation target: 2% - Discussed as the Fed’s preferred long-run target Mortgage rates in early 1980s: 15% to 20% - Mentioned as the cost of Volcker-era disinflation Unemployment tipping point example: around 3% - Used to illustrate a nonlinear Phillips-curve-like relationship Potential alternative inflation target: 3% - Raised as a possible argument for more policy room near the zero lower bound

Pivotal Quotes: "Central banks play a key role in terms of inflation." — Mark Sandy: Summarizing the lesson from the pre-Fed era and the importance of monetary institutions "If I think that price is going to fall further, I'll keep delaying my spending, keep delaying my investment." — Chris Dorites: Explaining why deflation becomes self-reinforcing and economically damaging "Inflation is a very... complex phenomena because Chris keeps pointing out, it's also related on psychology and sentiment." — Mark Sandy: Concluding reflection on why inflation is hard to forecast and manage

Implications: Listeners should expect inflation to cool as pandemic distortions fade, but the episode warns that expectations, psychology, and policy mistakes can prolong inflation. For policymakers and businesses, the key lesson is to stay attentive to supply recovery, labor-market slack, and inflation anchoring.