Does Inflation Matter Anymore?

Rapid inflation and 18% mortgage interest rates are only a distant memory for baby-boomers in the United States. It has never been experienced by today’s millennials. In the U. S. rapid inflation has in fact not been experienced by anyone under the age of 40.

Almost all household and business decisions today are made under the assumption inflation will always be in the 2-3% range. Policy makers, consumers and businesses are totally unprepared for a new inflationary spiral. But the early signs of “demand pull” and “cost push” inflation are lurking largely unnoticed everywhere.

That’s because monetarism as championed by the late Milton Friedman has been the false “cover” that has allowed federal deficits and the national debt to grow unchecked during the Obama presidency, and now even more during the Trump administration.

“Inflation is always and everywhere a monetary phenomenon”, has been the monetarist credo ever since the Volcker FED under the Reagan administration helped to end the Carter inflation in the early 1980s. Yet the fiscal policy demands of the Vietnam War not monetary policy per se was the source of the last inflation in the United States. 11.3% CPI-U inflation in 1979, 13.5% in 1980, and 10.3% in 1981. Mortgage interest rates as high as 18% prevailed during this period. The 1982 recession was how that out-of-control inflation ended. The CPI-U in 1982 slipped to 6.1%, but it took that severe recession and not strict monetary controls per se to end it.

The U.S. is currently in stage one of what is almost certain to become the first rapid inflation since the Nixon Carter years unless the global economy becomes mired in recession first. The key stages of an inflationary spiral are always three: (1) it starts off slowly and is almost imperceptible, so authorities tend to ignore it; (2) once an inflation is broad and well established, no matter the rate of increase, it becomes harder and harder to contain it; (3) after other measures fail like the wage price controls of Nixon/Carter era inflation, a recession decelerates and breaks the inflation with or without actions by the FED.