Historically low price inflation (until 2021)


For nearly 30 years until 2021, price inflation remained relatively low. That represented the longest low-inflation period over the more than 70 years that U.S consumer prices have been tracked.

Despite the year-end surge, the inflation jump in 2021 still looks modest compared to the inflation surges of the 1970s and early 1980s. Inflation measured for the year finished at 4.7% measured by the CPI index and 3.9% measured by the PCE index preferred by the Federal Reserve.

This latest jump falls short of the most recent peak in 1990 (i.e., 5.4% and 4.4%) and nowhere near the double-digit inflation of the 1970s and early 1980s.

The data track record suggests that the inflation surge is unlikely to persist beyond one year. What may be more important is whether the average rate of inflation going forward is higher—given some amount of inflation fear that remains now that it has been awakened from a 30-year sleep.

Here is a bit of background about the two inflation measures used here….

The Consumer Price Index (CPI) is calculated by the U.S. Bureau of Labor Statistics. The Personal Consumption Expenditure (PCE) index is calculated by the U.S. Bureau of Economic Analysis.

One reason the Fed prefers the PCE measure is because it accounts for substitution effects as prices change. In contrast, the CPI’s “fixed basket” does not account for substitution. Inflation tends to be slightly lower by the PCE measure because of these substitution effects.



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