Nothing affects the markets and an economy more than “inflation” and for most economists, including those within the Federal Reserve of the United States, inflation seems to be a very difficult factor to get their hands around and to understand. This article is my attempt to once and for all bring “clarity” to this mystical factor we call inflation.

I am going to do this by showing the reader one simple graph that every investor in the United States needs to understand. Although they say a picture is worth a thousand words, I say the following graph is worth more than a thousand words. The following graph shows you the history of inflation in the United States, year by year, over the past 101-year period. The data comes from the Bureau of Labor and Statistics and is known as the Consumer Price Index (CPI).

You may note that I have color-coded the bars in the above graph in “red” and “green”. Red bars reflect a period with “deflation” or a period when inflation was greater than 5.0%. Green bars reflect a period where inflation fell somewhere between 0-5%.

You may also note that I have segregated the above graph into four distinct periods, which I think most people, at least those who are not color blind, would say are reasonable segregations based upon color alone. Here is how I view the above four periods:

1. The crazy, crazy world period between 1916-1951. This period included two world wars, a great depression, and essentially ended near the end of the Korean War. It reflects a period when inflation was “out of control”—managing an economy through this period would have been nearly impossible. Note how this period included “deflation” unlike any of the other periods.
2. A good period for the economy between 1952-1967. This was a period when the United States, essentially free from the destruction of World War II, pretty much had things to its own, while the rest of the world recovered from that nastiest of nasty wars.
3. A not-so-good period for the United States between 1968-1981. This was a period that the United States had to deal with the cost of the Vietnam War, the cost of new federally supported social programs, the first “energy crisis” with rapid and significant increases in oil prices, and the effects of complacency from the second period.
4. A pretty darn good period that began in 1982 and which has continued through to the present time. This is a period that historians will look back and call the ”beginning of the technology economy” in a new world of Globalization—lead by the way, by the United States of America.  America was and has been "Great" throughout this period, despite what some doomsayers and a recently inaugurated President may want you to believe.

Argue with me all you want, but I challenge you to break down the above data and history and to come up with a better explanation for what it shows than my simple explanation above. I believe you will fail trying.

So what, Jim? Even if I did believe you, what are you telling me that I didn’t know or believe already?

As I said earlier, the above graph is worth more than a thousand words and in this short article, I do not have the ability to explain everything that can be derived from the above historical picture. Regardless, here are a few takeaways that everyone needs to understand:

• The world has changed over the past 100 years and you might as well forget trying to make sense of economic policy prior to 1981. We live in a new economic world now. One that began to take shape in the early 1980s and which is driven by “unprecedented technological advances”, "unparalleled productivity increases", and “globalization”. Economics as we have known it in the past, needs to grow up, and a new discipline, based upon high moral and ethical principals, which I call Globanomics must become the new rigor;
• War is bad for an economy and world wars are extremely bad for economies.
• Globalization is good for an economy, especially if that economy can keep pace from a “technological” standpoint.
• The Federal Reserve of the United States was very slow in recognizing this new world economic change, which resulted in one of the largest transfers of wealth from “middle class Americans” to the likes of China and the wealthy—thus increasing the gap between the “poor”, “middle class”, and the “wealthy” in the United States over the past 35-years.

Now with that said, my next few articles will take a more in-depth look at “inflation”, but in those articles, I will primarily focus on the latest of the above four periods that I mentioned above. There is much more to learn, so stay tuned. History is not bunk and sometimes it is useful to look back upon it so that you can better understand today.