Many view the recent few decades of low inflation as an exception to the rule. Indeed, numerous inflation hawks seek mean reversion to a ‘natural’ state of higher inflation that could include a return to 1970s-level inflation. However, a more complete sweep of history shows low inflation is the ‘natural’ state, and the 1970s was an extreme exception. In some ways, we have needed decades to unwind the 1970s overshoot.
The UK has the longest history of inflation data, dating to the 1200s in the Middle Ages. Over the almost 1,000 years since, inflation has averaged around 0.9% (Chart 1). During this period, bouts of deflation were the norm, including during the industrialisation of the 1700s and 1800s. Before then, high inflation typically occurred during wars. But the 1900s onwards saw the worst bouts of inflation, with the 1970s the most extreme.
US inflation is a similar picture, though the ‘quality’ data only dates to 1800. Median inflation over that period was 1.2% (Chart 2). Bouts of deflation were common before the Second World War, and inflation typically coincided with wars (Civil War, WW1 and WW2). But like the UK, the worse period was the 1970s.
Therefore, historic data suggests inflation has typically hovered around 1%. High inflation has typically occurred around wars, and bouts of deflation have been common even during periods of economic growth. Moreover, phases of high inflation like the 1970s tend to be followed by periods of low inflation or deflation. We see this as a cautionary tale for inflation hawks.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.