Inflation has been full of surprises throughout its three-year climb in the United States, yet one clear thing is its overall path resembles the trend it followed between 1966 and 1982.
US borrowing costs have climbed above 5pc for the first time since 2007 amid growing fears that the country’s central bank will have to keep interest rates higher for longer to tame inflation. The Federal Reserve controls short-term interest rates, which ripple through the economy via market-based rates like Treasury yields and borrowing costs on longer-term debt like mortgages and company bonds. But unlike the gradual, deliberate changes to rates enacted by the Fed, moves in longer-term market rates, like the 10-year Treasury yield, are less predictable and subject to many factors. These moves are very important to the economy and can alter the behavior of consumers and companies faced with suddenly higher borrowing costs.
Yields on 10-year Treasuries crossed the psychologically important threshold on Monday morning, hitting 5.018pc. The steep rise in the 10-year yield in recent months has captured the attention of investors, economists, and policymakers. This “sudden, rapid increase” has shaken faith in the continued resilience of the economy, said economists at the rating agency Moody’s, threatening “to knock the U.S. economic expansion off course.”
The 10-year Treasury yield also influences important consumer rates: The average 30-year mortgage has recently approached 8 percent and credit card rates are now above 20 percent. As the 10-year yield has risen, the rally that propelled the S&P 500 higher earlier in the year has stalled, with the benchmark stock market index ending the week down 2.4 percent.
A chart of the year-over-year change in the consumer price index shows headline inflation is taking a “fairly similar” track to the one it took more than four decades ago, according to Alejandra Grindal, chief economist, and London Stockton, research analyst, at Sarasota, Fla.–based Ned Davis Research.
Although the absolute levels of the CPI year-on-year changes of the two periods are not quite the same, the trends depict apparent similarities. Inflation rose well above 10% in the 1970s and 1980s, whereas this time around in June 2022, it peaked at 9.1%. However, in both periods inflation subsequently dropped and was followed by troubling developments in the Middle East.
Throughout the 60-ies the US economy was stimulated by increased government spending and tax cuts, which led to accelerating inflation by the decade's end. In the mid-1970s, a powerful cartel of oil producers imposed an oil embargo on the US and a handful of other countries, and then the U.S. embargoed oil from Iran. The oil prices soared and propelled a second round of inflation later that decade and into the early 1980s.
In 2022, stretched supply chains caused by the lasting effects of the pandemic, abundant stimulus payments injected in the US economy alongside a widespread energy crisis due to the war in Ukraine kicked inflation into high gear. Although inflation has subsided since then, it is still at a stubbornly elevated level, which many analysts believe will continue into 2024. Last week, flared-up tensions in the Middle East sent oil prices climbing 2% in one day as Iran’s foreign minister called for an oil embargo on Israel.