This Chart is Driving the Higher for Longer Message

This chart of US CPI Inflation has been making the rounds for a few weeks. It shows the year-on-year percentage chage from 1966 to 1982 (blue) overlayed on the past decade (orange). Is this mearly a coincidence? Or could it be a pattern of longer-term inflation tendencies? History will reveal the facts in due course, but it’s the thing that is keeping global central bankers up at night.

There are several similarities with the 1970s inflation we are exhibiting today. As the saying goes, history does not necessarily repeat, but it rhymes. There was a major war going on (Vietnam) compared to today’s war(s) (Russia-Ukraine-NATO, China technology). There were massive federal deficits; today they are magnitudes higher and projected to get worse. Unions were very strong. While the percentage of the private sector in the US that was unionized in the 1970s was much higher versus the 5% today, recent settlements (UPS, AAL, others…) are comparable to the labour demands of the 1970s. Social spending programs were blossoming in the 1970s. Today it’s environment and progressivly worsening demographics as driving demand and supply side catalysts. OPEC plus seems much more coordinated than they were when prices collapsed during the early days of COVID when Russia-OPEC discussions brokedown. To be sure, understanding Russia’s role in the world going forward is complicated. It’s clearly a hit to suply, not an increase. We could clearly see an energy shock like we did in the 1970s. Europe has seen one to be sure. A nuclear Iran is always a major supply side risk. Northern African supply chains are anything but stable. We could argue the peace dividend that accrued to the world after the Wall came down is now reversing. We could arge that massive inequality will keep labour stronger for longer.

To be sure, there are disinflationary offsets. Globalization is no longer a positive here, but massive debt levels are clearly a growth headwind. The development of AI and improved labour productivity is disruptive and should help too, but there are some offsets. The debate will be loud and boisterous at times to be sure, but we can bet policy makers will err on the side of containing inflation and would be more willing to see some economic weakness before the extreme policies seen on the second wake of the 1970s inflation cycle were needed. Powell has 2.5 years left on his term (May 2026). That might be a legacy and a timeline that markets may need to adapt towards in terms of how much longer are rates kept higher?

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