Warning Signs of Inflation Ahead

The economy is showing signs of an impending inflation wave, similar to the one experienced in the 1970s and ’80s. According to Torsten Slok, an economist, the current inflation path is closely similar to the inflation wave of 1973/1974, with a potential for another “inflation mountain” to emerge over the coming months.

Understanding the Inflation Mountain

The “inflation mountain” refers to a period of high inflation, followed by another even steeper climb several years later, driven by external shocks and policy missteps. The first “inflation mountain” of the 1970s was followed by another, taking off around 1978. If the pattern holds, the economy would be due to scale another peak starting almost exactly in the fall of 2025.

Charting the Risks

A chart shared by Slok and Apollo juxtaposes the current path of U.S. core CPI with inflation periods from 1974 to 1982, illustrating a close similarity to the inflation wave of 1973/1974 with that of 2021/2022. The chart demonstrates that the first “inflation mountain” of the 1970s was followed by another, taking off around 1978.

Mounting Inflation Fears

These aren’t the first warnings on inflation from Slok. In late August, he argued that Jerome Powell’s choice of words at the Jackson Hole Symposium showed that the Fed sees structural distortions from tariffs and immigration policy. If those forces keep inflation sticky and Powell cuts rates, as he’s under pressure from the White House to do, Slok wrote that he could be vulnerable to a 1970s-style “stop-go” policy mistake.

Potential Consequences

In such a scenario, reminiscent of the ’70s, if the Fed loosens policy prematurely, inflation could spike, leading to the painful corrective measures seen under Powell’s predecessor Paul Volcker, who hiked rates aggressively and weathered severe, double-dip recessions.

Recent Inflation Readings

The most recent inflation read, the Personal Consumption Expenditures index, showed prices rising 2.6% in July compared with a year ago, the same annual increase as in June and in line with what economists expected. Excluding the more volatile food and energy categories, prices rose 2.9%, up from 2.8% in June and the highest since February.

Economists’ Predictions

These warnings come as economists debate the shape of the back half of the 2020s, questioning whether a recession is ahead or the “stagflation” that accompanied the inflation mountains of Slok’s analysis. UBS sees an elevated recession risk from the hard data from the U.S. economy, while JPMorgan was alarmed at July’s shockingly soft jobs report, saying that a slide in labor demand of the magnitude shown in July’s jobs report “is a recession warning signal.”

Conclusion

In conclusion, the warning signs of inflation ahead are clear. With the current inflation path closely similar to the inflation wave of 1973/1974, and the potential for another “inflation mountain” to emerge over the coming months, it is crucial to be aware of the potential consequences of a policy mistake. As economists continue to debate the shape of the back half of the 2020s, it is essential to stay informed and prepared for the potential risks and challenges that lie ahead.