Inflation could be repeating the trajectory of the late 1960s, which laid the foundation for sustained high prices the following decade, according to economic historian Niall Ferguson.
Ferguson told CNBC on Friday that policymakers are facing a new challenge in the form of rising inflation as a result of responding to the Covid-19 pandemic in a fashion similar to their response to the Great Recession of 2008.
“What is interesting about disasters is that one can lead to another. You can go from a public health disaster to a fiscal, monetary and potentially inflationary disaster,” Ferguson said at the Ambrosetti Forum in Italy.
“It is not such a big disaster, it doesn’t kill people, but an inflation liftoff would be a problem.”
U.S. consumer prices rose 5.4% in July from a year earlier, marching the largest jump since August 2008.
The Federal Reserve and many economists maintain that the recent spike in inflation will be “transitory,” but Ferguson called this into question.
“How long is transitory? At what point do expectations fundamentally shift, especially if the Federal Reserve is telling people, ‘We have changed our inflation targeting regime and we don’t mind if inflation goes above target for a while’”? said Ferguson, the Milbank family senior fellow at the Hoover Institution, Stanford University.
“My sense is that we are not heading for the 1970s but we could be rerunning the late 1960s, when famously the Fed chair then, McChesney Martin, lost control of inflation expectations.”
His comments come after former IMF chief economist and Harvard professor of public policy Kenneth Rogoff suggested in an article this week that the U.S. withdrawal from Afghanistan had added to the list of “unsettling” parallels between the 2020s and the “perfect storm” of factors that led to very high inflation in the 1970s.
Ferguson suggested that the high inflation of the ’70s had its origins in the late ’60s, adding that it was too early to conclude with confidence that the current rise is transitory.
Data released Tuesday on U.S. home prices and consumer inflation expectations may have added to the Fed’s concerns. The S&P/Case-Shiller index, which measures home prices across 20 major U.S. cities, rose 19.1% year on year in June, the largest jump in the series’ history going back to 1987. A survey from The Conference Board showed U.S. consumers now see inflation running at 6.8% 12 months from now. That’s up a full percentage point from a year ago, or 17.2% on a relative basis.
Former Treasury Secretary Larry Summers tweeted: “Every time you hear that inflation is transitory remember that double house price inflation hasn’t yet shown up in the indexes. Housing represents 40 percent of the core CPI [consumer price index].”
Ferguson suggested that the delta Covid-19 variant may have done the Fed a favor in cooling the U.S. economy slightly after a red hot summer, but other external factors could still come into play.
“The big inflations in history have nearly always been associated with war. The thing that really would de-anchor inflation expectations would be if this cold war … between the United States and China escalated into a hot war, say, over Taiwan,” he said.
Ferguson speculated that in light of the U.S. withdrawal from Afghanistan, Chinese President Xi Jinping may see the emerging American reluctance over military conflict as an opportunity to try to seize total control of Taiwan. This would force the U.S. into a decision as to whether to enter another distant war or cede its global dominance, he suggested.