Historical Comparison: The Three Major Inflation Waves in the US during the 1970s

Over the weekend, the United States and Iran resumed their attacks on each other. After repeated cycles of confrontation and ceasefires, many no longer believe the Iran conflict will end soon, nor that oil prices will quickly decline. This has also led to expectations that inflation will not subside in the short term. Historical comparisons serve as a valuable reference, so let’s examine a pessimistic perspective regarding inflation. The historical U.S. inflation regime is characterized by waves, including the post-Great Depression and World War II period, as well as the “Great Inflation” era from 1965 to 1982. Especially during the inflationary period after the 1970s, U.S. inflation was not a one-off event but a sequence of three waves. This is quite similar to the concept of a "main upward wave" in the stock market. From the current standpoint, the U.S. economy appears strong. However, despite the supposed strength, the federal government has been forced into exceptionally large fiscal deficits, which are now a primary inflation concern. In this analysis, the sharp rise in inflation from 2020 to 2022 marks the first wave of a long-term inflation regime. Now, the wars in Ukraine and Iran have yet to reach clear conclusions, while the U.S. government continues to pursue ongoing aggressive fiscal and monetary stimulus. This view suggests that what we are seeing is merely the beginning of the second wave of inflation. (Refer to Chart 1) The multiple waves of inflation from the 1970s to 1980s led investors to doubt for a prolonged period whether inflation could be controlled. It was not until twenty years after inflation, during the disinflation period (1981 to 2000), that people finally believed the U.S. had overcome inflation. This time, how many years will it take before people believe the inflation issue is resolved? Another related topic is the market. If inflation persists, referencing the high-inflation era of the 1970s, overall stock market price-to-earnings ratios would shrink, negatively impacting both the nominal and real performance of equities. In contrast, the precious metals market significantly outperformed the stock market. Refer to Chart 2. Chart and data sources: Barron’s, Bloomberg, Kevin Smith