Long-term data can shed light on current inflation – NBER paper

Economists looking for a historical parallel to the current inflationary surge should look back further than the 1970s, according to a new working paper.

Published by the US National Bureau of Economic Research, the paper uses a semi-structural model to identify the permanent component of the current inflationary surge.

Authors Stephanie Schmitt-Grohé and Martín Uribe find this component is much smaller when estimated over a long horizon – 1900–2021 – than if only the period from 1955–2021 is used. Over the long horizon, the persistent element is 51 basis points, they find, versus 238bp if only the period after 1955 is used.

Schmitt-Grohé and Uribe suggest the result is driven by the fact that the post-World War II period is “dominated” by the inflation of the 1970s. But in contrast to the current moment, the 1970s bout was 10 years in the making, they note.

By contrast, the early part of the 20^th century is “rich in large and short-lived inflationary spikes”, they say. It also contained a pandemic, the Spanish flu of 1918.

As in the earlier period, the recent surge in inflation has built up quickly. Economists remain unsure whether it will fall back quickly as well, but Schmitt-Grohé and Uribe suggest current forecasts may be led astray by a reliance on more modern economic data.

They add that the volatile opening to the 20^th century could be a useful guide to other shocks that are now materialising, such as climate change.