Chart of the Week

THE 1970s REDUX?

Whilst cooling growth and inflation rates are giving the Central Banks covering fire to lower interest rates, they are likely sowing the seeds for a resurfacing of inflationary pressures within the next 1-2 years.

During the early 1970s, the US economy (and many others) experienced a second wave of inflation soon after the Federal Reserve began cutting interest rates which, in turn, came about because policymakers felt they had vanquished the first inflationary scare in the late 1960s.

In reality, acute price pressures had become embedded in the economy so the loosening of financial conditions added fuel to fire, sparking a spike in inflation that saw CPI surge to 12% by November 1974. A final, more sinister, wave emerged in the latter part of the decade before the Volcker Fed implemented a series of aggressive rate hikes, in the early 1980s, that ultimately caused inflation’s demise.

The prevailing economic situation is vastly different to back then with higher debt loads, greater international trade and less trade union power all arguing against a repeat of the 1970s trends.

But there is a strong argument that headline CPI rates are in the process of hitting a nadir around current levels which, significantly, remain above the Central Banks’ target rates.

This suggests we are in a new regime for monetary policy.

One where policymakers are prioritising financial stability and their Government’s abilities to refinance its debts over growth and inflation targets.