Inflation is the business opportunity of a lifetime

Inflation? Oh yeah, I’m old enough to remember. As I’m sure you saw, inflation numbers came out red-hot on Thursday, with prices for the month of January rising at an annualized rate of 7.5%, the highest since February 1982. “This is a big shock to me,” says Jian Yang, professor […]

Inflation? Oh yeah, I’m old enough to remember.

As I’m sure you saw, inflation numbers came out red-hot on Thursday, with prices for the month of January rising at an annualized rate of 7.5%, the highest since February 1982. “This is a big shock to me,” says Jian Yang, professor of finance at University of Colorado. “When I hear that this inflation rate is the highest in 40 years, that really causes some concern about a challenge to the U.S. economy.”

So I think it’s worth going back four decades or so to see what caused inflation then, how it was tamed, its collateral effects — and to see how all that applies to today.

First, just a note on how unfamiliar this is. Let’s agree that you’re not aware of an economic phenomenon like inflation until you’re say, 10 years old. Therefore, no American under the age 50 has really experienced inflation. (The population of the U.S. is 329 million and the number of Americans over 50 is about 116 million, which means that 213 million Americans, or some two-thirds of us, have never lived with inflation.)

In fact, most of us are used to goods and services getting ever cheaper. This chart shows prices of a number of food items declining over the past 40 years even more than the overall rate of inflation, and even after recently ticking up.

Chart by David Foster, graphics specialist at Yahoo Finance

Let’s now hop in the hot tub time machine and travel back to the last time we faced inflation. Students of economic history may recall reading about those WIN, or Whip Inflation Now, buttons the government sent out. Was that in 1982? No, the buttons came out years earlier, which speaks to a potentially alarming point. By February 1982 inflation was on the downswing. Economists were delighted with that month’s number of 7.6%, a four-year low, down from 11.4% a year earlier. Inflation actually peaked at 14.8% in March 1980. To wit: Nothing to say inflation won’t climb more.

Inflation had been a nagging problem for years back then, starting around 1974 when Gerald Ford was in office. It was in October of that year, with inflation running at 12.2%, that Ford declared inflation “public enemy number one” in a speech before Congress. (I always wondered what James Cagney thought about that public enemy business.)

Ford’s plan included a number of measures to bring inflation under control which included carpooling, turning down thermostats and growing vegetables. He also asked citizens to sign a pledge they would send to Washington to receive a WIN button. As a 14-year-old I remember vividly scrutinizing prices of items on supermarket shelves. I also remember those WIN pins, as they were objects of ridicule.

People wore them upside down which read “NIM,” saying it stood for “No Immediate Miracles” or “Need Immediate Money.” There were also earrings, World War II-like bric-a-brac and sweaters (which I mentioned last June).

Alan Greenspan, a White House adviser, then later wrote WIN was “unbelievably stupid.” The Washington Post called the WIN campaign “one of the biggest government public relations blunders ever.”

Even worse for Ford, none of it worked. Inflation trended down toward the 1976 election, but Jimmy Carter still beat Ford in large part because of the poor economy. Once again inflation dipped but in 1979 it roared back over 10%. That, along with the Iran hostage crisis, doomed Carter in his reelection bid, and he lost to Ronald Reagan.

Besides being the undoing at least in part of two presidencies, what can we learn about inflation back then? How can we apply it to today?

(Original Caption) Washington, D. C.: President Reagan meets with Paul Volcker, Chairman of the Federal Reserve Board in the Oval Office 7/16. Volcker gave Reagan some talking points for use if other summit leaders in Ottawa express their growing concern over high interest rates. Volcker's response that issues is that the health of the world economy is dependent on getting US inflation under control.

(Original Caption) Washington, D. C.: President Reagan meets with Paul Volcker, Chairman of the Federal Reserve Board in the Oval Office 7/16. Volcker gave Reagan some talking points for use if other summit leaders in Ottawa express their growing concern over high interest rates. Volcker’s response that issues is that the health of the world economy is dependent on getting US inflation under control.

First off let’s explore what caused inflation in the 1970s. In retrospect it’s pretty easy to see. Cause number one was Vietnam. Economist Tom Riddell did a nice job here of laying out how the Vietnam War — which was roughly from the mid-1960s to the mid-1970s — led to higher prices. President Johnson wanted to wage the war and increase social programs but didn’t want to raise taxes, so spending and the federal deficit climbed, which heated up the economy which the Washington Post explains here.

Cause number two were oil shocks, the first coming in 1973 when OPEC enacted an oil embargo on countries that supported Israel in the Yom Kippur War. The second was in 1979 after the Iranian Revolution and the Iran-Iraq war. Obviously both pushed up oil prices, which raised costs all across the economy in what is known as cost-push inflation.

What finally tamed inflation were draconian measures by Fed Chair Paul Volcker, who raised rates — the prime rate hit 20% in June 1981 — and targeted money supply, as described by Former President of the Federal Reserve Bank of St. Louis, William Poole.

What’s causing inflation today? Number one, COVID-19 created all manner of supply shortages. Number two, trillion-dollar government spending programs particularly in the U.S., plus the Fed expanding its balance sheet. And number three the decline of globalism, which had optimized for the cheapest production of goods.

Where do we go from here? With any luck, COVID and its accompanying trade friction will go away. And government programs are running their course. But both COVID and government programs were massive events. As for nationalism, I don’t think that’s reversing anytime soon. Yes, technology will drive costs down, but I don’t see inflation disappearing overnight.

Finally, I want to touch on collateral effects, starting with decades ago. Among other developments back then, higher prices led to the creation and/or proliferation of generic brands (private label), dollar stores and even the rise of Walmart and other discounters, as consumers searched for low-priced goods to mitigate inflation. If inflation persists today I would anticipate Newton’s third law — for every action an equal and opposite reaction — coming into play. In other words some new business models will address and take advantage of it. For some, inflation won’t be a problem. It will be an opportunity.

This article was featured in a Saturday edition of the Morning Brief on February 12, 2022. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter: @serwer

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