The ends of inflation surges: Lessons from the US experience, 1948-2021

Overall, the figure shows that with the notable exception of the period 1973-83, inflation has largely fluctuated in the 0-4% range. That said, there have been several episodes of surging inflation. It surged in the aftermath of World War II as wartime restrictions were ended and pent-up demand led to sharp rises in prices to a new equilibrium level. It increased sharply during the Korean war in 1950-53 and rose gradually in the late 1960s during the war in Vietnam as government spending rose sharply. Two notable features of the figure are the oil price shocks in 1973-74 and 1979-80, which caused inflation to rise above 10% per annum. And, finally, inflation rose dramatically in 2021.

Interestingly, the figure also shows that sharp rises in inflation appear to be followed after some time by a decline. The brief period of deflation in 1949-50 is a case in point. To study the behaviour of inflation around these episodes, the notion of a "surge" must be clarified. Here it is defined as an annual change of year-over-year inflation of at least three percentage points. Since investor concerns are triggered by a seemingly relentless increase in inflation, the criterion must be satisfied for at least two quarters in a row.

As shown in the table below (and in Figure 2), that definition leads to four inflation surge episodes, staring in 1950, 1973, 1979 and 2021. That on its own is striking - inflation surges are rare events. That, in turn, means that there are few data points, which makes it difficult to draw firm conclusions.