Remember Inflation?

I've noticed lately that our country is highly polarized.

No, I'm not referring to social media or cable news. I'm thinking about the great divide between Baby Boomers and every other younger cohort on the topic of inflation risk.

Baby Boomers worry about inflation.

Many of us graduated college into the jaws of the 1970s "stagflation" (a terrible-sounding word describing a stagnant economy with high inflation) and watched our grandparents' pensions, paid in nominal dollars, slowly disappear over two decades as they aged. It was common to hear them say, "We're living on a fixed income" but they were not — they were living on a disappearing income in terms of purchasing power.

Fast forward to 2019 and a GenX'er recently suggested that we "old-timers" have too much fear of the "big bad inflation wolf."

I have no idea whether inflation rates the likes of which we experienced in the 1970s and 1980s will reappear anytime soon. Long-term inflation is unpredictable. I hope the GenX'er is right but I'm not willing to bet my retirement that he is. High inflation can be catastrophic and when we plan for retirement we should take catastrophic outcomes off the table when we can.

Inflation peaked at over 13% in 1980. I had a 14% mortgage. Inflation rates were even higher in earlier decades. But annual inflation is a snapshot. Prolonged inflation is the real monster.

I stumbled across the following chart recently at inflationdata.com[1]. It shows historical annualized inflation rates by decade. Inflation for the decades of the 1970s and 1980s averaged 7.25% and 5.8% per year, respectively. Again, much lower than the annual peak in 1980 but destructive in its persistence.

(Click on image to enlarge)

We can now update inflation from 2010-2019 to 1.78%.

Notice that periods of high inflation come and go with no regularity. Also, notice that the high inflation of the 1970s and 1980s was immediately preceded by very low inflation in the 1950s and 1960s. No one saw it coming.

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