Inflation could be repeating the trajectory of the late 1960s, which set in motion sustained high inflation in the following decade, according to top economic historian Niall Ferguson.
Speaking to CNBC on Sept. 3, Ferguson said that policymakers are now facing a new challenge in the form of rising inflation after responding to the COVID-19 pandemic in a manner similar to the 2008 Global Financial Crisis.
“What is interesting about disasters is that one can lead to another. You can go from a public health disaster to a fiscal, monetary, and potentially inflationary disaster,” Ferguson said at the Ambrosetti Forum in Italy.
“It is not such a big disaster, it doesn’t kill people, but an inflation lift-off would be a problem.”
Americans continue to face higher costs as U.S. consumer prices rose 5.4 percent in July from a year earlier, marking the largest annual jump since August 2008.
The U.S. Federal Reserve and many economists maintain that the recent spike in inflation is “transitory,” and merely reflective of the ongoing effects of supply chain breakdowns during the pandemic and shifts in consumer demand as more activities like travel become safer again.
But some experts have begun to express fears that the unusual conditions of the COVID-19 economy and large amounts of government stimulus will continue pushing prices higher throughout this year.
Ferguson also called this into question, suggesting that we could, in fact, be repeating the trajectory of the late 1960s,
“How long is transitory? At what point do expectations fundamentally shift, especially if the Federal Reserve is telling people, ‘we have changed our inflation targeting regime and we don’t mind if inflation goes above target for a while?'” Ferguson said.
“My sense is that we are not heading for the 1970s but we could be re-running the late 1960s, when famously the Fed Chair then, McChesney Martin, lost control of inflation expectations.”
His comments come after Dennis Lockhart, former president of the Atlanta Fed, said he sees inflation as transitory “for now” but could last through 2022, making it vital to manage inflation expectations.
“I still buy the inflation hypothesis. I think the price pressures that we’re experiencing are greater and possibly more persistent than was expected by the Federal Reserve,” Lockhart told the Reuters Global Markets Forum on Thursday.
“But as I said, I buy the transitory hypothesis for now. That said, the play out of the inflation story appears to be less clear-cut than the Fed had hoped or expected. Some of the signals are mixed. There are elements that are not going to retreat soon.
“There’s lots of chatter and noise, with some alarmist messaging, that could be affecting public sentiment on inflation. So, it’s possible that price pressures will be sticky and last well into 2022. That’s an uncomfortable situation, for the Federal Reserve, and their hypothesis that the inflation that we saw in the spring and early summer is actually transitory.
“We have to watch expectations closely, because it’s one source of fuel for persistent inflation.”
Data released Tuesday on U.S. house prices and consumer inflation expectations may have raised further concerns for the Fed. The S&P/Case-Shiller index, which measures home prices in 20 major U.S. cities, rose 19.1 percent year-over-year in June, the biggest jump in series history dating back to 1987.
Meanwhile, a survey by The Conference Board showed that American consumers now expect inflation of 6.8 percent within 12 months, marking a full percentage point from a year ago, or 17.2 percent on a relative basis.
Former Treasury Secretary Larry Summers wrote on Twitter: “Every time you hear that inflation is transitory remember that double house price inflation hasn’t yet shown up in the indexes. Housing represents 40 percent of the core CPI [consumer price index].”
Ferguson suggested that other factors could well come into play, such as the ongoing tensions between the United States and China, which could present Chinese President Xi Jinping with an opportunity to take full control of Taiwan.
“The big inflations in history have nearly always been associated with war. The thing that really would de-anchor inflation expectations would be if this cold war … between the United States and China escalated into a hot war, say, over Taiwan,” Ferguson added.