Thread by @WhiteHouseCEA

New from CEA: we examine previous periods of heightened inflation and see what they can teach us about inflation in 2021. 1/
whitehouse.gov/cea/blog/2021/…

Since World War II, there have been six periods in which inflation—as measured by CPI—was 5 percent or higher: 1946–48, 1950–51, 1969–71, 1973–82, and 2008. 2/

The three most recent inflationary episodes were largely a function of oil shocks; in contrast, pandemic price dynamics have not been primarily driven by oil supply, though we continue to closely monitor ongoing energy price behavior. 3/

The episode from 1969–71 was because the economy was growing quickly at nearly 5 percent per year for half a decade, which is not the case at present. 4/

The episode during the Korean War happened as households rushed to buy goods in anticipation of a supply shortage. While households are consuming more today in the aftermath of COVID, they are not hoarding in anticipation of a supply shortage. 5/

Today, while many industries face supply constraints, in today’s situation there is not a broad push to shift production away from consumer goods. 6/

The period right after World War II potentially provides the most relevant case study, as the rapid post-war inflationary episode was caused by the elimination of price controls, supply shortages of durable goods, and pent-up demand. 7/

Today’s shortage of durable goods is similar—a national crisis necessitated disrupting normal production processes. Instead of redirecting resources to support a war effort, however, manufacturing capabilities were temporarily shut down or reduced to avoid COVID contagion. 8/

Additionally, pent-up demand put upward pressure on prices following World War II. During the war, households were limited by the widespread rationing of consumer goods. During COVID, households were also functionally constrained. 9/

One substantial difference between the inflation dynamics of World War II and today is that price controls were a wartime policy tool that were not implemented during COVID. 10/

A key question with any inflationary episode is if the increase in prices is seen as transitory or permanent. If price increases are broadly seen as permanent, then firms and individuals will raise their expectations about the future level of inflation. 11/

The Livingston Survey of economic forecasters—begun in June 1946 by a columnist for the Philadelphia Inquirer and run today by the Federal Reserve Bank of Philadelphia—shows that forecasters expected low or even negative inflation over the 1947–1951 period. 12/

While actual inflation often came in higher during this time, respondents did not appear to persistently mark up their short-run inflation forecasts due to the transitory inflation episodes of World War II and the Korean War. 13/

Today, we have metrics measuring longer-run inflation expectations in the form of surveys and market-based measures. If transitory inflation pressures were spilling over into longer-run expectations, we would anticipate seeing these measures rise to historically high levels 14/

However, both market-based measures and survey-based measures of inflation expectations have broadly recovered from pandemic-lows to levels more consistent with pre-pandemic expectations. 15/

No single historical episode is a perfect template for current events. When looking for historical parallels, it is useful to concentrate on inflationary episodes that contained supply chain disruptions and a spike in consumer demand after a period of temporary suppression. 16/

Inflation remains a key economic metric for individuals and firms, and as such the CEA will continue to carefully gauge the trajectory of inflation. /end