Submitted by Taps Coogan on the 9th of February 2020 to The Sounding Line.

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You would never know it while listening to today’s central bankers bemoan ‘historically and persistently low inflation,’ but inflation was actually lower during the decade that proceeded the ‘Great Inflation’ of the late 1960s and 1970s than it has been during the past decade.

From 1955 through 1965, just prior to the start of ‘Great Inflation’ in 1966, CPI inflation averaged just 1.5% per year. Over the past ten years (2009 through 2019), CPI inflation has averaged 1.8%. Those who think that today’s ‘low’ inflationary environment has been historically low or long, caused by some previously non-existent economic force, or that technological advancements are the determinant factor driving inflationary trends are encouraged to examine the chart below.

Jerome Powell best encapsulated today’s obsession with the idea that inflation is somehow historically and persistently low when he declared that the inevitable return of interest rates and inflation to 0% was the “greatest monetary policy challenge of our time.”

Not only has inflation remained lower for longer in the past, the last time it did so, it didn’t end with interest rates back at zero. It ended with over 20 years of disruptively high inflation.

Ignore for the moment that today’s ‘low’ CPI inflation is simply a statistical artifact of averaging compulsory expenses with high inflation rates (education, healthcare, housing) and discretionary purchases with low inflation rates (toys, phones, etc…). The implication that low inflation has become an impediment to growth doesn’t really stand up to examination. Several of the most robust periods of economic growth in American history have occurred despite, because of, or perhaps entirely unrelated to low inflation and outright deflation. Nearly the entire 19th century, which saw rapid technological advancement, industrialization, and economic growth in the US occurred despite outright deflation at most times. More recently, the 1950s and 1960s, arguably America’s economic golden era, witnessed lower inflation than today.

Today’s obsession with getting 1.6% PCE inflation to 2.0% at any cost is simply the inability of central bankers to accept that an economic expansion will not conform to a completely arbitrary 2%-at-all-times-for-all-countries PCE inflation target. Considering that the very same central bankers consider today’s roughly 2% real GDP growth rate to be inline with long term potential, expanding the monetary base of the US by several percentage points of GDP in order to close a 0.4% shortfall in PCE inflation completely dismisses the wildly more dangerous risk that this period of low inflation will end exactly the way it did last time or that inaccurate inflation measures are understating today’s true inflation rate.

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