For “Data” we will put today’s US Consumer Price Index report into a long run historical perspective:
#1: First up is headline CPI inflation, which came in at +7.9 percent today. The chart below goes back to 1948 and shows the following:
February’s reading is the highest since January 1982’s +8.3 percent. Inflation has come on strong in the last year; February 2021 CPI growth was only 1.7 percent. Scan the chart and you’ll see that, since the 1960s, inflation has only risen this quickly in the early and late 1970s.
Once inflation becomes entrenched it is very hard to dislodge. Noted in the chart are the 2 periods since World War II where inflation remained above 8 percent for a protracted period: 22 months in the early 1970s and 40 months in the late 1970s. It took a Fed-induced recession in 1981 – 1982 to reset inflation back down to reliably below 5 percent.
On the leftmost part of the chart is the CPI inflation caused by the end of World War II and the start of the Korean War. Inflation rose quickly to 9-10 percent, but then receded just as quickly thereafter. Even if those periods are the best analogies to today’s supply chain shortage-driven inflation, we can still expect CPI to increase further in coming months.
#2: CPI Food inflation was also +7.9 percent in February 2022. While not part of “core” inflation, food is a critical category for how consumers perceive inflation’s effects on their everyday lives. Along with energy prices (which were up 26 percent in February 2022 on an annualized basis), food costs are also how inflation filters through into the political arena.
The chart below shows that, like overall CPI levels, food inflation is also back to levels last seen in the early 1980s (July 1981, +8.4 pct). Unlike CPI, however, food inflation has been a problem since 2020. Over the last 2 years CPI Food is up +11.8 percent versus +9.7 percent for overall CPI.
Peak food inflation in the 1970s was +20.1 pct in December 1973 and +13.1 pct in February 1979. While both periods were also times of rising energy prices, other issues from increasing exports to a shortfall of Soviet grain production in the early 1970s played a role in high food inflation as well.
The supply chain issues of the post-World War II – Korean War period also sparked food inflation, which peaked at 14-15 percent.
#3: Last up is Owners’ Equivalent Rent Inflation, which at 24 percent of the CPI is the largest component in the index. Its track record is much shorter than the other 2 categories we’ve looked at today, with data only back to 1984. Prior to that, housing inflation was measured as a product of mortgage borrowing costs. OER is a survey-based measure of what homeowners think their house would rent for, indexed over time.
The data here shows that current OER inflation of 4.3 percent is already bumping up against the last 2 peaks, at 4.6 pct in 2002 and 4.3 pct in 2006. A lack of supply, still-low interest rates, and a strong labor market all point to house prices continuing to rise. The all-time OER peaks were in the 1980s, at 6.2 – 6.6 percent.
Takeaway: US inflation has a lot of momentum just now, and there’s not much that will cool it down in the near term.