It’s probably fair to say the 2020s have been defined by inflation. For the better part of five years, we’ve been feeling the pain at the grocery store and the gas pump. And we’ve seen how it can turn a casual dinner out into a $100 evening.
While we’d argue the inflationary environment over the last few years hasn’t been as bad as the headlines would suggest[1], there was a notable uptick in the most recent Bureau of Labor Statistics report.
As of the March reading, consumer prices rose 3.3% year-over-year[2], which was the largest increase since 2022. A big contributor to that increase was gas prices, which surged 21% in a single month — the biggest jump since the 1960s[3].
This ongoing frustration at how expensive everything has become leads to a question I’ve been hearing more and more:
“Will prices ever come back down again?”
It’s an understandable question. If things are expensive, wouldn’t it be great if prices fell? Cheaper eggs and cheaper gas! I mean, what’s not to love?
Quite a lot, actually. Deflation — which is a sustained decline in prices across the economy — is not the friend it appears to be.
Here’s why. When prices consistently fall, consumers and businesses do something perfectly rational but collectively damaging. They wait. Because why buy something today if it’ll be cheaper next week or next month?
This rational act of delaying purchases ultimately starves companies of revenue, which pressures margins, which leads to layoffs. And naturally, unemployed workers spend less, turning falling prices into a self-reinforcing spiral — one economists watched play out in Japan for the better part of three decades[4], and one that briefly threatened the U.S. during the Great Recession.
It’s the reason central banks tend to fight deflation more aggressively than inflation. A little inflation is actually healthy, economically speaking, while a little deflation tends to be an ominous sign.
Quick sidebar: Slowing inflation is not deflation, that’s disinflation, which is largely what we’ve experienced since the 2022 peak. Disinflation is a decline in the rate of price increases, meaning prices are still rising, just more slowly than they were. This is what the Fed has been trying to accomplish in getting inflation back to its stated goal of 2%. We just want to point out the distinction between these two terms because they are often used interchangeably. Sidebar complete.
Which brings us to another word I’ve seen creeping into recent headlines: stagflation[5].
It sounds disconcerting, and historically, it is. Stagflation describes a rare combination of three things at once: high inflation, stagnant or negative growth, and rising unemployment. Think of the 1970s: incredibly high inflation coupled with an economic recession.
The reason stagflation is so worrisome is that the typical levers central banks pull to fight inflation tend to weaken economic growth, and those that stimulate growth tend to worsen inflation. Meaning there’s no simple solution to fix the problem, so stagflation can be a tough situation to break.
But are we actually headed in that direction today?
Headlines like we’ve seen recently tend to invite overreaction: A slightly hotter inflation report and a slight uptick in unemployment suddenly becomes “proof” that a repeat of the 1970s is inevitable.
This is where historical perspective can help.
Yes, inflation has picked up recently[2], and unemployment has edged higher as well[6], though prime working-age employment remains near its all-time high[7], which is encouraging. In any case, inflation and unemployment remain well below their 50-year averages, and that 50-year window includes one of the strongest economic stretches in history. And GDP, for the moment, remains quite positive, even after accounting for inflation[8]. Yes, it has slowed from the last few years, but given that we’re coming off some excellent economic growth years, a slowdown was probably inevitable.
Our point is that, for now, we do not seem to be headed for anything close to a repeat of the 1970s. Could we ask for lower inflation, stronger economic growth, and lower unemployment? Of course. That would be ideal.
But economies are rarely perfect. Instead, they ebb and flow. And today’s environment, while imperfect, remains far from the worst-case scenarios that recent headlines might suggest.
As always, stay the course!
- [1] Until the March reading, inflation has been at or below 4% for nearly three years, and at or below 3% for most of the last two years. Cleveland Fed
- [2] CNBC
- [3] Newsweek
[4] Nomura Connects - [5] Yahoo Finance
- [6] St. Louis Fed
- [7] St. Louis Fed
- [8] Trading Economics
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