Investors Can Temper Their Inflation Fears: Post-COVID Inflation is Unlikely to Resemble the Great Inflation of 1968 to 1982

Abstract

On December 10, 2021, the U.S. Bureau of Labor Statistics reported a 6.8% per year increase in the CPI, intensifying the ongoing debate about whether high inflation will prove temporary or more lasting. This paper seeks to inform this debate by evaluating the current conditions contributing to the recent uptick in inflation and comparing them to conditions that caused similar episodes of high inflation in the past. The paper concludes that inflationary pressures are likely to be temporary, perhaps resembling the two-year period that followed World War I and the Great Influenza. It appears highly unlikely, however, that the United States is on the brink of another Great Inflation, which lasted from 1968 to 1982. The primary reason is that the Federal Reserve of today is much less likely to suffer from the philosophical biases, knowledge gaps, and political pressures that allowed the Great Inflation to occur. If the conclusions in this paper are correct, they may prove valuable to investors. Should elevated levels of inflation prove temporary, over-reactions may lead to decisions that impair an investor's long-term objectives rather than foster their achievement.

Keywords: Inflation, World War I, COVID-19, Pandemic, Post-War Inflation, Post-Pandemic Inflation

JEL Classification: N20, N21, N22, N42, N92, G01, G10, G11, E30, E31, E44, E50, E51, E52, E66