At this point many jaded readers will want to point out that there was a housing boom more than a decade ago, and it led to a deflationary crash, not inflation. There is a critical point of difference. When the property bubble burst, American households were painfully overloaded with debt. That has steadily been rectified over a decade of deleveraging, which, not coincidentally, was accompanied by disappointing growth. Now, household debt service ratios are at historic lows, as this chart from Watling shows:
Consumers are primed to spend money in a way they haven’t been for a generation. And the money is right at their fingertips. Monetarists would say that was the condition for inflation. After the privations of 2020, it is a safe bet that there is a lot of pent-up demand as well, so Keynesians should also brace for inflation.
If this seems unduly negative, to be clear, these numbers also suggest that the U.S. is ready for quite an economic boom. That should be something to enjoy, and might even go some way to leveling out the grotesque inequality that has built up over the decades of stable inflation. But some of the factors that have thwarted inflation in recent years are now absent.
Moving to the corporate sector, corporate treasurers also have plenty of cash on hand. Masses of it. As in twice as much as they have held on average over the last six decades, as shown in this Strategas chart, which uses Federal Reserve data:
Beyond the core measure, attention tends to be grabbed by headline inflation, which includes fuel and food and which, after all, represents the stuff that people actually have to spend money on. Next year could see a big change. For the post-GFC decade, oil prices have generally trended down. At any one point, gasoline prices have tended to be lower than they were a year earlier, neatly helping to reduce headline inflation.
While the oil market is still in a lot of trouble, and gasoline futures are still cheaper than they were 12 months ago, the chances are strong that that will change in the next few months. The base effects from this spring’s crash in oil prices should ensure that headline inflation starts to rise:
Then there is the matter of the dollar. It is weakening. The currency ended its last depreciation cycle during the GFC and has trended upward for much of the time since. This reduces inflation by making imports cheaper. A weakening dollar turns this around and becomes a pressure for inflation to rise.
So far, the world has avoided “cost-push” inflation arising from the bottlenecks and supply shocks created by the first phase of the pandemic. But there are still a few months to go, at best, and prices of a number of commodities are rising. For the longer term, if globalization doesn’t pick up again, that tends to mean companies must source their goods with more expensive suppliers, pushing up prices.
On top of all this, the Fed is now in the business of telling everyone that it wants inflation to get above 2% and stay there. The central bank is targeting average inflation, which means that it will happily tolerate gains above target for a while. When Fed Chair Jerome Powell unveiled that new policy at the Jackson Hole virtual symposium this summer, I had fun likening him to the drivers of Reliant Robin three-wheeler cars whose fondest wish was that their car could go fast enough to get them a speeding ticket. There is much slack in the labor market, minimal belief in inflation, and still little in the way of coordinated fiscal expansion, thanks to U.S. congressional gridlock. There is no reason to fear hyperinflation, or even anything on the scale of what was witnessed in the 1970s.
