Jump in U.S. inflation may signal that history is repeating itself

It suddenly seems that worrying about inflation has gone mainstream. What was so recently a quirky ideahas shifted into a mediamass movement as markets sag and news reports are filled with talk of rising prices.

Wednesday's latest consumer price index (CPI) data from the United Statesshowing inflation rose to 4.2 per cent instead of the expected though already high 3.6 per centonly added to the apprehension.

For Canadians thinking this is a U.S. phenomenon that we can safely ignore, don't count on it. If inflation really does kick in, price rises in a deeply entangled North American economywill not be stopped by a thin border. If we're not there yet, we are likely to catch up.

The reason for that "if" in the previous paragraphis that one or two sharp rises in inflation do not necessarily signal an inflationary trend. On the other hand,nearly three generations of North Americans who have never witnessed true inflation in their adult lives have few reference points to decide for themselves if what we are seeing really is the beginning of inflation.

Learning from experience

One way to help rectify that is to find someone, maybe a grandparent, who witnessed the onset of serious inflation in the 1970s and 1980s. In lieu of a handy grandparent, I tracked down82-year-old David Laidler, professor emeritus at Western University in London, Ont., who in the 1960s was an early expert on the subject and says he is worried that history may be repeating itself.

But before making Laidler's case, it is probably a good idea to explain why Wednesday's U.S. inflation figures, while worse than expected, maynot be as astounding as they appear. It is also important to remember that there are many smart economists, including those at our central banks, who insist this is a blip, not a trend.

For one thing, the inflation numbers getting all of the attention includevolatile food and fuel prices. Central banks use a measure ofinflation with the volatile parts taken out, called core inflation. Core remains under twoper cent. Also, thosecurrent year-on-year numbers are a comparison of recent prices with those that were unusually low a year ago due to pandemic shock.

Earlier this week, as markets had already begun trembling in anticipation of Wednesday's inflation data, senior U.S. Federal Reserve official Lael Brainardrepeated the central bankers' assertion that inflation is just surging temporarily as the economy goes from full stop to full throttle.

"Remaining patient through the transitory surge associated with reopening will help ensure that the underlying economic momentum that will be needed to reach our goals ... is not curtailed by a premature tightening," Brainardsaid in aspeech on Tuesday.

It appeared that markets were not listening. One of the reasons may be thatCPI is not the only inflation indicator being bandied about this week. Another is something called thefive-year breakeven rate,a comparisonofgovernment-issued zero inflation bonds to other five-year bonds.

A glance at the above link will show the market expects a sharply rising inflationary trend.

Almost everyone you talk to says they have noticed things getting more expensive. Business leaders, including the Oracle of Omaha, Warren Buffett, say their costs are rising, and the companies they controlhave begun to increase pricesto compensate.

Ringside seat

And according to economist David Laidler, that's exactly how inflation started last time around in the late 1960sand '70s.

"Let me be clear, I wrote my first article that had to do with the theory of inflation in 1965, so I was there at the beginning," the economist quipped in a phone interview.

Earning his PhDwithNobel Prize-winning economist Milton Friedman at the University of Chicago, Laidlerhad a ringside seat watching price rises eataway at the value of money over thenext 20 years as inflation rose to the high teens.

Laidler saysthat most people, including central bankers, were caught by surprise.

"You get prices of particular inputs going up,and everything gets put down to special, local instances," he said.

But Laidler saysthose special, localized cases were actually symptoms of a broader cascade of effects spread throughprices and wages.

"What's happening is demand is beginning to percolate through goods markets.... The goods producers start trying to increase output and they need more inputs for that, and they begin to run into bottlenecks," he said. "And then the prices go up there and then the guy who'sselling to consumers says, 'Well, gee, I have to raise my price because my input prices have gone up.'"

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Laidler says when you look at prices of things such aslumber and steel and copper and when you see the shortage of workers with the right skillsit is credible to imagine the same thing is happening all over again.

"And if what happened in the late '60sand early '70shappens again, the authorities are going to say,'Oh, this is a temporary thing, we don't have to worry about it.'"

He saysthat could allow inflation expectations to get embedded, making it a "real pain in the neck" to muster the political will to stop it.

Laidler sayswhile rising house prices are not considered inflation because they are assets, not consumer goods,they have in the past been an indicator ofcoming inflation.But he saysif you think we are entering a period of inflation, this is the time to buy real goods such as cars, appliances things that will last but could become more expensive in the future.

He remembers someone asking him back in the 1970s what to do with their money, and he recalls offering only slightly tongue-in-cheek advice thatthey shouldspend it on a good holidaybecause at least they will have their memories.

And while Laidler is pleased to share his own memories of an earlier era of inflation, he adds this proviso that clearly does not just apply to him:

"Anyone who says they really know what is going to happen over the nextcouple of yearswithout a doubt is not to be trusted."

Follow Don Pittis on Twitter @don_pittis