Most research papers on inflation focus on the period from 1950, after World War II, or from the 1980s after former Fed Chairman Paul Volcker destroyed inflation with a mighty series of interest rate hikes.
Yet these periods offer less information than they might at first appear. Since the 1950s there have only been two major inflationary movements, and since the 1980s only one. The graph below shows inflation in the United States by calendar year since 1775. What it shows is that before 1950 inflation looked quite different. Negative inflation was almost as common as positive inflation.
The picture becomes even clearer when we look at a 20-year moving average. The graph below shows that the period up to 1950 was characterised by long periods of negative inflation followed by long periods of positive inflation.
The Fed
Perhaps the question arises as to what role the Federal Reserve plays here. And while I think that the rise of the Fed has certainly contributed to the inflation trend - think, for example, of lower inflation volatility - this should not be overstated. The Federal Reserve was established in 1913 and inflation was high in the decades that followed. This was not so much due to policy as to the First World War. It was not until 1994 that the first discussions about an explicit inflation target started and it was not until 2012 that an official inflation target was included.
It cannot be ruled out that the past 70 years are rather like a deviation that confirms the rule.
Inflation drivers
Apart from monetary policy, there are other factors that play a role in long-term inflation. These are mostly the usual suspects: demographics, globalisation, technology, war and luck, or the lack thereof. For some of these factors, the case can be made that they will have a less damaging effect on inflation in the coming decades. More on that next time.
Jeroen Blokland is the founder of True Insights, a platform that offers independent research to construct diversified multi-asset portfolios. Blokland was most recently head of multi-assets at Robeco. His “chart of the week” appears every week on Investment Officer.