A chart of U.S. consumer price index (CPI) inflation has been making the rounds for a few weeks. It shows the year-over-year percentage change from 1966 to 1982 in blue, overlayed on the past decade in orange.
Is this merely a coincidence, or could it be a pattern of longer-term inflation tendencies? History will reveal the facts in due course, but it’s the thing that is keeping global central bankers up at night.
There are several similarities with the 1970s inflation that we are seeing today. As the saying goes, history does not necessarily repeat, but it rhymes.
Back then, there was a major war going on in Vietnam, compared to today’s war in Russia-Ukraine-NATO and tension with China over technology.
There were massive federal deficits then, while today deficits are magnitudes higher and projected to get worse.
Unions were very strong. While the percentage of the private sector in the U.S. that was unionized in the 1970s was much higher versus the five per cent today, recent contract agreements at UPS, AAL and other are comparable to the labour demands of the 1970s.
OPEC+ seems much more coordinated than they were when prices collapsed during the early days of COVID-19 when Russia-OPEC discussions brokedown. Understanding Russia’s role in the world going forward is complicated. It’s clearly a hit to supply. We could clearly see an energy shock like we did in the 1970s. A nuclear Iran is always a major supply side risk. Northern African supply chains are anything but stable. We could argue the peace dividend that accrued to the world after the Berlin Wall came down is now reversing, and massive inequality will keep labour stronger for longer.
There are disinflationary offsets. Globalization is no longer a positive here, but massive debt levels are clearly a growth headwind. The development of AI and improved labour productivity are disruptive and should help too, but there are some offsets.
The debate will be loud and boisterous at times, but we can bet policymakers will err on the side of containing inflation and will be more willing to see some economic weakness before the extreme policies seen on the second wake of the 1970s inflation cycle were needed. Jerome Powell has nearly three years left before his term as chair of the U.S. Federal Reserve is set to end in May 2026. That might be a legacy -- and a timeline -- that markets may need to consider in terms of how much longer interest rates are kept high.
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