This week the Biden Council of Economic Advisers blogged about “Historical Parallels to Today’s Inflationary Episode”.
Consumer demand in 2021 is roaring back after pandemic shutdowns. Demand for airline travel is exceeding expectations. Car dealer lots are empty.
The authors argue that, of all the periods of rapid inflation in American history, the boom after WWII has the most parallels to today.
During WWII, Americans were obviously in war mode. Price controls and supply shortages led to deprivation on the Homefront. Families had trouble buying cars, just like today.
Instead of focusing on consumer or industrial durable goods, manufacturing capabilities were concentrated on military production. Today’s shortage of durable goods is similar—a national crisis necessitated disrupting normal production processes. Instead of redirecting resources to support a war effort, however, manufacturing capabilities were temporarily shut down or reduced to avoid COVID contagion.
Remember when oil had a negative price in 2020? While people in the US were staying home, many were building up personal savings. As soon as the “war” ends, consumers compete as buyers and drive up the prices of the limited available goods.
They present the post-war inflationary episode as dramatic but temporary, because it only lasted for two years. It’s short compared to inflation of the late ‘70’s. They are standing behind the Powell “transitory” story, in their conclusion.
On the other hand, they say that the most comparable moment in history to today involved the price level spiking 20% and taking two years to come down. I’m pondering a very expensive repair on our car, just make sure I don’t have to buy a new one soon.