Inflation is the business opportunity of a lifetime
Inflation? Oh yes, I’m old enough to remember that.
As you’ve surely seen, the inflation numbers came out strong on Thursday, with prices for the month of January rising at an annualized rate of 7.5%, the highest since February 1982. “That’s a big shock to me,” said Jian Yang, professor of finance at the University of Colorado. “When I hear that this inflation rate is the highest in 40 years, it really raises concerns about a challenge for the US economy.”
So I think it’s worth going back about four decades to see what caused inflation back then, how it was brought under control, its collateral effects – and to see how it all applies to today.
First, just a note on how unfamiliar this is. Let’s agree that you are not aware of an economic phenomenon like inflation until you are, say, 10 years old. Therefore, no American under 50 has really experienced inflation. (The population of the United States is 329 million and the number of Americans over the age of 50 is about 116 million, which means that 213 million Americans, or about two-thirds of us, n have never lived with inflation.)
In fact, most of us are used to goods and services getting cheaper and cheaper. This chart shows that the prices of a number of food items have fallen over the past 40 years, even more than the overall inflation rate, and even after rising recently.
Now let’s jump into the time machine and go back to the last time we faced inflation. Students of economic history might remember reading about those WIN, or Whip Inflation Now, buttons that the government sent out. Was it in 1982? No, the pimples came out years earlier, which reveals a potentially alarming point. In February 1982, inflation was down. Economists were pleased with the figure of 7.6% that month, a four-year low, from 11.4% a year earlier. Inflation actually peaked at 14.8% in March 1980. Namely: Nothing to say that inflation will not rise further.
Inflation had been a persistent problem for years back then, beginning around 1974 when Gerald Ford was in power. It was in October of the same year, when inflation reached 12.2%, that Ford declared inflation “public enemy number one” in a speech before Congress. (I always wondered what James Cagney thought of this public enemy affair.)
Ford’s plan included a number of measures to tame inflation, including carpooling, lowering thermostats and growing vegetables. He also asked citizens to sign a pledge they would send to Washington to receive a WIN button. When I was 14, I vividly remember scanning the prices of items on the supermarket shelves. I also remember those WIN pins, because they were objects of ridicule.
People wore them upside down and read “NIM”, saying it meant “No immediate miracles” or “Need immediate money”. There were also earrings, bric-a-brac and WWII style sweaters (which I wrote about last June).
Alan Greenspan, a White House adviser, later wrote that WIN was “incredibly stupid”. The Washington Post called the WIN campaign “one of the government’s biggest public relations mistakes.”
Worse still for Ford, none of it worked. Inflation dropped around the 1976 election, but Jimmy Carter still beat Ford largely because of the bad economy. Once again inflation fell but in 1979 it rose to over 10%. This, along with the hostage crisis in Iran, doomed Carter in his bid for re-election, and he lost to Ronald Reagan.
Besides having at least partly destroyed two presidencies, what can we learn about inflation at the time? How can we apply it today?
First, let’s explore what caused inflation in the 1970s. Looking back, it’s pretty easy to see. The first cause was Vietnam. Economist Tom Riddell has done a good job here explaining how the Vietnam War – which was fought roughly from the mid-1960s to the mid-1970s – caused prices to rise. President Johnson wanted to go to war and increase social programs but didn’t want to raise taxes, so spending and the federal deficit soared, warming the economy, as The Washington Post explains here.
The number two cause was the oil shocks, the first occurring in 1973 when OPEC placed an oil embargo on countries that had supported Israel during the Yom Kippur War. The second was in 1979 after the Iranian revolution and the Iran-Iraq war. Obviously, both drove up oil prices, which increased costs across the economy in what is known as cost-push inflation.
What finally brought inflation under control were the draconian measures of Fed Chairman Paul Volcker, who raised rates – the prime rate reached 20% in June 1981 – and targeted the money supply, as describes former Federal Reserve Bank of St. Louis President William Poole.
What causes inflation today? First, COVID-19 has created all kinds of supply shortages. Second, trillion-dollar government spending programs, particularly in the United States, plus the Fed expanding its balance sheet. And number three the decline of globalism, which had optimized for the cheapest production of goods.
Where do we go from here? Hopefully, COVID and the trade frictions that come with it will go away. And government programs are running their course. But the COVID and government programs were massive events. As for nationalism, I don’t think that will be reversed any time soon. Yes, technology will drive down costs, but I don’t see inflation disappearing overnight.
Finally, I want to address the side effects, starting decades ago. Among other developments at the time, rising prices led to the creation and/or proliferation of generic (private label) brands, dollar stores, and even the rise of Walmart and other discounters. , with consumers seeking low-priced goods to dampen inflation. If inflation persists today, I would expect Newton’s third law – for every stock an equal and opposite reaction – to come into play. In other words, some new business models will take care of it and will benefit from it. For some, inflation will not be a problem. It will be an opportunity.
This article was featured in a Saturday edition of the Morning Brief on February 12, 2022. Get the Morning Brief delivered straight to your inbox Monday through Friday by 6:30 a.m. ET. Subscribe
Andy Serwer is editor of Yahoo Finance. Follow him on Twitter: @server
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