I recently worked on an IT project for a customer who had some vague requirements. Throughout the project he would tell me what he wanted, I would then get busy with the scripting to do exactly what he said he wanted, show him the finished product and he’d say, “That’s not what I wanted,” and we’d end up back at square one.

We went through several frustrating rounds this way, until finally I asked, “What is it you need to do?” I listened to his vision of what he wanted, and I came up with a solution. After asking him to give me a couple of days to come up with prototype for him to kick around, I set off to give him the kind of information I would want if given the same task. He was completely thrilled with the prototype, and I got finish it up and check that project off my to-do list.

I’ve been working a post about the context of the Great Inflation that’s been sort of the same thing as the customer who thought he knew what he wanted, but really didn’t know how to get there. And I’ve taken the hard way around it, some versions with way too much information and a sort of meandering point that even I found hard to understand after having written it.

But now, I think I know what it should look like, and the first point of it is that there is one thing that is, in my view, least constructive and more confusing in the debate about inflation in the present than it is enlightening is when the curveballs about being on the slippery slope to 1970’s style inflation get thrown in to the discussion. It reminds me a lot of demagoguery and here’s why.

PCE-All

This is a graph of the PCE index as far back as the data set can go up to the present. Looking back to the decade of the 1970’s on this graph, a couple of points stand out almost immediately.

  • It looks as if it started in 1973 and was more of an immediate sort of problem that persisted
  • At its peak, the problem was pretty large, like nothing we ever seen since.

But the most telling, at least for me, is comparing it to 2006-2007 when the idea of cost push inflation started reappearing in Fed transcripts, and “Whip inflation now” buttons were being passed around.

I could put big red circles and arrows on the graph pointing out what is 1970’s inflation and what isn’t, but of course, that would be pointing out the obvious. In fact, the graph says that in 2006, inflation at the time about 30% less than late 1980’s level, the level the guy who solved the 1970’s inflation problem ran with his namesake Fed. In 2006, inflation was the highest it had been since then. But there is considerable doubt in my mind that, comparatively, it was the emergency that required the kind of response it got. We were told we were in danger of exactly the 1970’s happening all over again and given the kinds of people who were running the Fed at the time, it’s hard to imagine that being possible, even if they actually had done very little.

In the unemployment graph, and even in the PCE graph I posted yesterday, we can see that those at the Fed did much more than very little, with the results showing nearly the same results as Volker incurred when he broke the 1970’s style mold (hit the economy with a sledge hammer).

PCE-UE

In adding unemployment to the PCE graph, other sort of interesting patterns emerge. I might make a post about the patterns I see here another day. But for now, I think I’ve done what I set out to do in the most direct way I know how – letting the data speak for itself in providing some context to the Great Inflation and how discussions of it might or might not be relevant to conversations about inflation today.

PS: On the supply side, we are no longer living in the 1970’s and have not lived there since the 1970’s. Since inflation generally occurs as a result of supply and demand side frictions coming together, for me at least, it’s difficult to imagine how policies designed to treat or avoid the conditions that caused the Great Inflation could be relevant to today beyond educational exercises that have lots warning labels prefaced with ‘back then’ applied to avoid the appearance of intellectual abuse.

 

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