Confessions of an Inflation Hawk

My buddy John Best often points out how the experience/trauma of growing up during the Great Depression imprinted lifelong behaviors for many Americans- including his relatives who folded and stored aluminum foil for repeat usage.

I’m too young to recall the Depression firsthand, but the inflation wars of the late 70s/early 80s likely made a similar impression on my economic thinking. The US inflation rate exceeded 6% every year but one from 1973-1982, reaching a peak of three straight double-digit spikes from 1979-81.

On a related note, I suspect few of today’s homebuyers are aware that for nearly all of 1979 through 1990, 30-year mortgage rates remained above 10%- and were consistently over 13% during 1981-84. I recall celebrating our sweet deal when we bought our first house in 1995 at a 7.25% rate. Similar levels today would probably spur Congressional hearings.

Early in my career inflation assumptions also served a key input to the annual budgeting process, as a dollar spent in December was worth less than one in February. This was a particularly critical factor for US companies with production plants south of the border- to stave off its own runaway inflation in the late 1980s, Mexico systematically devalued its currency by one peso per day for an extended period.

With each passing day, fewer business practitioners have direct experience dealing with the disruption caused by inflation cycles last felt in the US 30+ years ago. For these reasons I’ve remained adamant about supporting economic policies that limit inflation to a reasonable range- which I define as a cap of 4-5%.

Yet a funny thing happened when cautionary think pieces about the looming return of 70s style inflation became the new trend- I simply couldn’t get lathered up. Why? The roots of the answer date to 2008, when the response to the country’s last financial crisis was the rollout of a massive stimulus package (remember “cash for clunkers”?).

Experts predicted huge inflation spike within the next few years- and I agreed with their assessment. And then…it never materialized. For the majority of time since the Great Recession, inflation has actually run below the Fed’s 2% target. Recent coverage has fretted over “the highest inflation in 13 years”- what’s left unsaid is that 13 years ago we were in the throes of our last crisis, and rates moderated soon after. Also, there’s compelling evidence that current price shocks are being caused at least as much by supply disruptions as excess stimulus.

I’ve already heard the counter than “today’s situation is different than 2008.” And that’s true. However, I’d suggest our present economic landscape (globalization, tax rates) has far more in common with 2008 than 1981. This isn’t to say inflation won’t heat up- I won’t be at all surprised if 2021-22 prove to be our highest inflation years so far in two decades. That’s not much of a hurdle to clear, however- they’re far more likely to resemble the 1989-90 cycle of 4.8-5.4% than the double-digit headaches of the early 1980s.

Although I hardly foresee a call to re-use aluminum foil on the horizon, it’s far from a winning formula to extend long-term credit at rates below the expected level of inflation. In the coming weeks we’ll address the levers at credit unions’ disposal to deal with an even moderately higher inflation environment.