Whatever happened to inflation?
I grew up during a time of accelerating inflation. The ‘60s and ‘70s were a time when price increases moved from 2% per year to around 15% per year. Prices went from doubling every 40 years to every 5. Gas prices went from 30 cents per gallon to $1.50. By the end of the ‘70s, when Milton Friedman said that inflation was always and everywhere a monetary phenomenon, we were ready to believe him. Raising real interest rates in the ‘80s and ‘90s seemed to slay the inflation dragon.
So when the Fed began aggressively adding to the monetary base in 2008, many people thought that this would not end well. Excessive monetary growth would translate into accelerating price appreciation. We’d seen this movie before. Only we didn’t get the ending we expected.
After quadrupling the size of the Fed’s balance sheet, inflation has gone … nowhere. Monetarist orthodoxy has been discredited. Traditional inflation hedges—gold, REITs, natural resource stocks—have underperformed. Adding billions of new consumers to the world economy with the fall of the Iron Curtain and the rise of China also added millions of factories churning out inexpensive goods and services—lifting them out of poverty in the process.
Inflation isn’t just monetary. Real growth matters. As long as trade and technology continue to accelerate, price increases will remain low.
Douglas R. Tengdin, CFA
Chief Investment Officer