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Bad and Ugly: The Two Types Of Inflation

Updated: Jun 22, 2022

Next week I will post my latest What Investment magazine column in which I wrote about the difference between cyclical and structural inflation and how this helps inform our understanding of what the next decade or two may look like for economies and financial markets. I do not include graphics in my columns so it might be useful to read this post - and to take in the chart below - ahead of me posting my What Investment column on Chimp Investor next week.

The chart is of the US consumer price index, indexed to 100 in 1900. To be clear, it is not the inflation rate - the inflation rate over a particular period is calculated by dividing the index at the end of the period in question by that at the beginning. And the chart is on a log scale so that an increase in the index from 100 to 200 is as visible as an increase from 1,600 to 3,200. This is as it should be - both increases are 100% and thus equals.

I'm not going to get into what one can learn from the above chart - that's for next week. I just want to use it to help explain the two types of inflation, structural and cyclical.

Cyclical inflation relates to business cycles - cycles which are on average around 6 years. I have ringed the cyclical inflation that pertained to the end of the 2003-2009 business cycle. It's hard to make out. The many others over the 120 years are harder still.

Structural inflation on the other hand relates to periods that span multiple business cycles. They are periods, most of them multi-decade, when consumer prices are either rising gently (1900-1915, 1949-1969, 1980-2020), falling (1920-1933), or rising quickly (1915-1920, 1940-1950, 1969-1980). You'll be able to see these clearly on the chart, unlike the short periods of cyclical inflation.

There have been seven distinct periods of structural inflation. This compares with what were propbably around 20 periods of cyclical inflation i.e. 20 business cycles.

To whet your appetite for next week's post I have annotated the chart.

Wishing everyone a nice weekend!

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

© Chimp Investor Ltd

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