February 18, 2016

Are We Due For An Inflation Spike?

When I was a kid the country went through a really bad period of inflation.   I was just a kid at the time so I didn't know what was happening at the time and I actually don't remember any of it.   I only now hear my dad occasionally recall bitterly about the >10% interest rates he was paying on a mortgage.   Recently inflation has been very tame.   Its hardly an issue.  But could we be due for another period of high inflation?

First I'd like to get a picture of how frequently we have seen high inflation periods.   The WSJ published A Brief History of U.S. Inflation Since 1775 which has a chart showing inflation back to 1775.   In that chart we can see periodic periods of high inflation.

There were large peaks of inflation around the years 1775, 1795, 1815, 1865, 1915, 1945 and 1975.
Those peaks are separated by 20, 20, 50, 50, 30, and 30 years respectively.  We haven't gone longer than about 50 years without seeing an inflation spike.   The last inflation spike was about 50 years ago.   We seem due for an inflation spike.

Of course this doesn't mean we're gonna have an inflation spike any time soon.    If you look at the chart from 1775 to 1835 you'd conclude that inflation spikes happen every 20 years and that in 1835 we'd be overdue for one.   But then it took another 30 years after that to see a spike.   For all we know right now we're in a rare long period of low inflation that could last 100 years in total.

Most of the high inflation periods had a cause.  War.   We saw high spikes of inflation near wars : The Revolution, War of 1812, Civil War, WWI, and WWII all coincided with major inflation spikes.
I found the article War and Inflation in US History, Not Worth a Continental at The MarketOracle that also has a graph of US inflation history and points out all the wars that matched inflation periods.   They show how each war the US has been in has had an inflation spike associated with it.   That is at least up until the most recent conflicts in the middle east.    So maybe the impact on inflation due to war is different now.

Monetary policy changes can also cause inflation.  In that article from Market Oracle they point to a couple changes in currency policy in the US that coincided with inflation spikes.   People are worried that the monetary policies that the Fed has had for the past several years will ultimately cause inflation.   The quantitative easing policy has effectively printed a pile of money that should, one would assume, result in inflation sooner or later.   But that hasn't happened,, and continues to not happen and not happen,... even though some people have been predicting "hyperinflation" any day now for the past 7-8 years or so.

You'd expect recent wars and monetary policy to cause inflation but it hasn't.   Maybe things have changed and we've learned how to control inflation.   Its hard for me to think that we've truly tamed inflation and that we'll never see an inflationary spike again.    It could all turn south any day now and inflation may be on the near horizon as an inevitable result of the Feds actions.  Or maybe not.  Maybe we'll continue to see the low inflation we've seen the past few decades.   We might have a big war (relatively speaking) that will result in high inflation.   Or maybe not.  

Given what we've seen in history, I think its reasonable to expect a decent spike of inflation at least in some point in the next 20-50 years.   Its not a given but it could very well happen.    Its something you should consider and prepare for the possibility.

Bottom Line:  Are we due for an inflation spike?   Maybe.  Maybe not.

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