Not Enough Inflation? Be Grateful.

As Fed followers know, they have been trying to induce a measure of inflation into the economy, and like the well worn metaphor of Lucy yanking the football away from Charlie Brown, it looks like it missed yet another chance to score a couple of points. Inflation remains practically non existent, judging by the latest reading, but perhaps we shouldn't complain. As the years go by, there is an ever growing cohort of Americans who never lived through an economy with rampant inflation. And boy, are they lucky.

See column two of the New York Times? That article probably didn't attract much attention that day for obvious reasons, but it gives you an idea what a horrible time the country was going through, besides the resignation of the President and the aftermath of the Vietnam war. Imagine if you were in the market for a new car, and inflation was so pervasive, the automakers summarily hiked prices by nearly 10% across the board. Which is bad enough, except for the fact these price hikes weren't exactly a "one and done" affair. They were relentless. Worse yet, it wasn't just for big ticket items. Inflation permeated everything. It was literally at the point where one went to a supermarket, bought a sundry item like a tub of butter, consumed it at home in a few weeks, and the replacement cost for a new tub was noticeably higher. This was immortalized in Paul McCartney's song "Junior's Farm," written in 1974.

"I took my bag into a grocer's store

The price is higher than the time before

Old man asked me why is it more"

Naturally, it was impossible for wages to keep up. These were frustrating and bitter times. The CPI in 1974 was 12.3%. The policy response from President Ford was, putting it charitably, lame. On October 8,1974, Ford addressed Congress, and invoking the call for "action, and action now" from FDR's inaugural speech, came up with this solution to combat inflation:

These lapel buttons were supposed to spur Americans into action to contain inflation. (Planting your own vegetable garden was actually a part of Ford's 10 point program.) Oddly, these were proven ineffective. It should be noted here that Ford inherited this problem from President Nixon, who tried to stop inflation in its tracks with mandated wage and price controls, which I think would be unimaginable today, even given all we've been through in the past decade. But while Nixon was fixing prices, his Federal Reserve Chairman, Arthur Burns, was executing an expansionary monetary policy. Burns was simply unwilling to administer the medicine the economy needed, (some say Nixon threatened him not to) and by doing so, made things worse, for longer. By the end of his term, inflation went to 14.8%. Then President Jimmy Carter appointed G. William Miller, who only made things worse. He lasted only a little over a year in the job. Carter replaces him with Paul Volcker. He almost immediately raised the Fed Funds rate and stopped inflation- and the economy- practically dead in it's tracks. The strategy seemed to be very effective, however. Note that after the first round of hikes in 1979, CPI plummets. (Red line)

By July 1980, things seem to be well in hand, and Volcker relents, bringing rates down, but inflation spikes sharply yet again, and Volcker boldly goes where no Fed Chair has gone before. He raises Fed Funds to over 20.00%, and he's not apologizing to anyone. He's going to kill this monster. In doing so, he writes a new script for Central Bank intervention in an economy. That broad grey bar in the chart above from July of 1981 to November of 1982 marks one of the most brutal recessions of my lifetime, exceeded only by the GFC. The U-3 rate that very month hit 10.8%, and while we can allow for changes in methodology used by the Department of Labor over the past 40 years, that rate actually exceeds the level hit during the post-Lehman era. So not only did people have to deal with rampant inflation, they also never dared ask for a raise. By comparison, deflation looks decidedly benign.

As of recently, the majority of Americans who are alive today were not alive at that time, and have absolutely no knowledge of what a relentless inflationary spiral looks like, and what it takes to get rid of it.

Let's be thankful for the problems we don't have.