Inflation comes and goes in waves
Inflation is a bit like the vagaries of the sea: it comes and goes in waves. This was especially evident during the “Great Inflation” that hit the United States between 1965 and 1982. A particularly painful period was from 1972 to the early 1980s, when inflation exceeded 14% on an annual basis. It was Paul Volcker, then chairman of the Federal Reserve, who brought it to its knees triggering two short but painful recessions and driving the key interest rate to around 20%.
The bitter pill was followed by a rapid recovery of the US economy. If one compares the inflation pattern then with that of today, things look somewhat similar (Graph 1). This begs a very legitimate question: after the recent cooling of consumer prices, are we facing a painful “second wave” with all its negative consequences?
Graph 1: Inflation came in waves in the 1970s, today it is very similar
Source: Refinitiv, Vontobel. Inflation data as of June 2023
To answer this question, we have developed a “second wave checklist” (Graph 2), in which we distinguish three broad categories: monetary policy considerations and supply and demand shocks.
Graph 2: Factors favoring a second wave
Studio Vontobel
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