Most people with lots of gray hair can remember the 1970’s, when inflation was out-of-control, often exceeding 10%. To stop it, the Fed intentionally caused a recession, to decrease demand for goods and services. It was the first and the last intentional recession, and it worked, crushing inflation. However, for those who lived it, there will forever be a mental link between inflation and recession. We tend to see inflation behind every tree. It made us hyper-sensitive to every price increase, while ignoring price decreases.
A little recession is a good thing, like 2%, which has been the Fed’s benchmark for over a decade now. For the last twelve months, it has been 2.6%. Even more scary, March rose 0.6% for a 7.2% annual rate, but that was primarily due to a temporary spike in gasoline prices. Still, I’m not worried.
Here’s what worries me: there are two types of inflation, i.e., demand-pull and cost-push. Demand-pull inflation occurs when buyers are willing to pay more and bid up the price. This type of inflation can be handled by causing a recession. Cost-push inflation occurs when material and component prices cause the price to increase, usually found in stagflation. This is often caused by supply disruption.
What worries me is that reopening the economy might ignite demand-pull inflation. (Retail sales were up a whopping 9.8% last month, primarily due to stimulus spending.) In addition, breakdowns in the supply chain could ignite cost-push inflation. We have never faced both types of inflation simultaneously! While unlikely, it could ignite the mother-of-all-inflationary-price -spikes. A recession might not be enough to tamp down this “combo-inflation.”
One advantage of having lots of gray hair is that you can accept the possibility and stay vigilant without losing sleep over it.