The blog post from Gabriel Mathy, Skanda Amarnath and Alex Williams is interesting. It argues that when we think about inflation, we should think more about the 1950s and less about the 1970s. Here is their statement of the standard narrative about the 1970s:

“The unemployment rate got too low in the late 1960s (3.4%), which set off inflation through a Phillips curve dynamic. This inflation then caused workers and price-setters to reset their inflation expectations higher, and these higher expectations cashed out into a higher rate of inflation over the following decade. This tug of war then went on until the Volcker Fed hiked rates far enough to cause a major recession, which reset everyone’s inflation expectations.”

Most of us have only three tools in the box. One: a Phillips-curvey idea that there is some level of unemployment below which any effort at economic stimulus must result in inflation. Two: the idea that inflation expectations are self-fulfilling prophecies because price-setters try to get ahead of them. Three: saying “inflation is always and everywhere a monetary phenomenon” without reflecting too carefully about what exactly that might mean.

And when these are the only inflation concepts you have, the conclusion you will come to is the Federal Reserve has better be vigilant.  But the 1950s, MA&W point out, saw very low unemployment at the beginning of the decade, and a subsequent “burst of inflation”, and no interest rate shock tactics were used to bring it down.

So, what was the difference? In the 1950s inflation rose quickly as America moved towards war in Korea, but: “Once it became clear that the Korean war would not require the same scale of economic overhaul or active management as world war two, inflation expectations quickly normalised . . . The account of ‘inflation expectations’ that this experience implies is one centred around world events, rather than past realised values of inflation. This version adds a degree of empirical realism, but sacrifices the idea that inflation — once started — will create a self-sustaining upward spiral. Instead, inflation rises and falls as expectations about the future change.” 

The punchline, of course, is that today the economic changes we see are not as dramatic or as permanent as those of the 1970s, and even if they do last a few years, inflation expectations need not spook us, and we don’t need to worry about a policy mistake. 

any serious thinking about inflation has to start by accepting that the most longstanding and widely accepted view of it has been proven wrong.