This Is What Could Trigger Big Growth In CPI Inflation

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Many episodes of monetary inflation, some even long and virulent, do not feature a denouement in a sustained high CPI inflation over many years. Instead, these episodes have the common characteristics of asset inflation and the monetary authority levying tax in various forms – principally inflation tax or monetary repression tax. For the monetary inflation to undergo combustion into sustained high CPI inflation it must generate necessary one or two necessary conditions. First, currency collapse; or second, a credit boom that spawns a persistent tendency of demand to exceed supply at present prices across a broad range of markets in goods and services.

That combustion happened in the 1970s in the US well into the severe monetary inflation which started in the early 1960s; it did not happen in the 1920s in the US, and it has not yet happened in the great monetary inflation in the US starting early in the second decade of the twenty-first century. The combustion process did get underway in the series of monetary inflations between 1985 and 2007 but was halted each time by a severe tightening of monetary policy.

Combustion did not occur according to the historians in the great monetary inflation of the 16th and first half of the 17th century as gold and silver flowed in from the Spanish conquests in South America. We read about the symptoms of virulent asset inflation in Holland, then the center of global finance, whether tulipmania or the wild ascent of shares in the Dutch East Company, or the speculative boom in Amsterdam real estate. The annual average rise of prices, however, was in a range of only 1 to 1.5 percent over more than a century, albeit enough cumulatively according to some historical accounts to be a principal factor in bringing about social, religious, economic, and political revolution. 

Even where we have rampant credit growth stimulated by monetary inflation, that may not be enough to bring about combustion into high CPI inflation. Disinflationary non-monetary forces may be enough to prevent this. These include a surge in productivity growth, globalization, and new competition from technological change. That was the story of the 1920s in the midst of the second industrial revolution. And if combustion had eventually taken place high CPI inflation would have run up against resistance from the automatic mechanisms still potentially operational under the truncated gold standard of that time.

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