Is inflation dead?

Reading through various sources – academic or otherwise – you would be forgiven if you thought so. After all there is even a new monetary theory that appears to be heavily relying on that fact for it to make sense.

But, as a university professor once reminded me, in economics nothing ever dies; it only mutates after more or less long periods of hibernation.

Inflation has been in decline and gone quiet for almost forty years now, despite particularly strong fiscal and monetary stimuli over the last 12 years.  This observation raises two flags which are at the core of what to make of this quiescence: time frame and measurement.

If we look at its behavior over many years we can see that inflation does tend to behave in long waves, sometimes even going negative (deflation). These periods can last even for decades. The current moderating/acquiescing state was preceded by an almost equally long period of increased price pressures.

As a sample of historical records, Figure 1 is a graph of Swedish consumer prices since the 1700s to the early 1900s, and Figure 2 shows the US experience over the last 150 years. Significant stretches of continued price pressures or moderation are evident. Can we comfortably say today that inflation is dead?

Figure 1(1)

Figure 2(2)

Another problem in thinking about inflation is measurement: what do we mean by ‘price changes’? What’s included in ‘price’? In the two graphs above, ‘prices’ are defined as consumer prices – of goods and services, essentially stuff we buy to use or consume. But what of asset prices? Shouldn’t they be part of this calculation?

I don’t have a definitive answer to the last question, primarily because it relates to what you want to measure. But I do know that if one created a price index that covered goods, service and asset prices the inflation figures so derived would look much different, especially in the same 12 years during which the death of inflation has gained almost unanimous support.

You may ask why we should include asset prices in the definition of inflation. The reason is that it gives us information about people’s choices, and with further study it may eventually help us determine when people’s preferences will change from boosting asset to boosting goods and services.

Maybe the realization that equities and other similarly risky assets can be quite volatile will push some people to reflect upon their financial priorities. Or perhaps it will be the concern about supply-chain disruptions and trade wars that will unleash the shift. When that happens en masse, inflation – the ‘normal’ CPI version – will most certainly not remain in its tomb.

Roberto Plaja, April 18, 2020

Cover: Inflation In Germany Gutenberg, drawing by Mary Evans;


(1)The evolution of Swedish consumer prices, 1290–2008, Rodney Edvinsson and Johan Söderberg