What Causes Inflation?

I have often said that significant inflation in the US typically takes a war for the following reasons:

  1. Demand increase as many people receive money without producing economic goods in order to build munitions and fight the war.
  2. Demand increase for materials and fuel deployed toward war vehicles and munitions
  3. Supply disruptions related to the war.

In order to illustrate this point, I collected CPI data from the table here: https://www.usinflationcalculator.com/inflation/historical-inflation-rates/ and I put it into a graph. Recession dates were shaded based on data from here: https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#:~:text=Early%20recessions%20and%20crises%20%20%20%20Name,crash%20followi%20…%20%202%20more%20rows%20

I also compiled dates from a number of events such as wars and drafts and put them into the following chart:

You’ll probably have to open the image separately to read it all, but you should find it interesting.

A few things to note:

  • The 1918-1920 influenza pandemic roughly coincided with WW1.
  • WW1 military employment ended rapidly, with 2.9 million solders in 1918 and 380,000 in 1920. Early strikes in 1920 were essentially crushed by this massive wave of job-seekers.
  • WW2 inflation started to rise with our increasing involvement from Lend-Lease and the Peacetime Draft. After war was declared, wage and price controls were initiated, which tamed the official data until they were lifted after the war.
  • It took some years of ramping up before the Vietnam War started affecting the CPI. Waves of wage & price controls starting in 1971 after Nixon took the dollar off the gold standard had similar effects on overall data.
  • Wage and price controls had significant impacts on CPI date throughout the 1970’s. They were relaxed under Carter and eliminated under Reagan.
  • The Iranian Revolution was mentioned because they were a significant oil supplier, and prices of oil started a rapid rise. This ended in an oil glut after the recessions from Volcker’s rate-tightening campaign reduced worldwide demand. Oil demand remained lower as power generation switched significantly away from oil toward Coal, Nuclear and Natural Gas.

The reason I put this information together was partly because of the hyperinflation fears brought from ideas such as Universal Basic Income. In my previous article I mentioned UBI and argued that it wouldn’t necessarily cause high inflation. I challenge you to think about the following:

How would a modern universal payment system compare to the massive payments that go out in times of war? Would this be enough to cause rapid inflation without the accompanied supply disruptions or hard resource demands that war brings?

Thank you for reading, and I hope you find this insightful.

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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1 Response to What Causes Inflation?

  1. Pingback: Modeling the effects of UBI | Market Thoughts – What I’m doing and why

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