High inflation may persist for years

Hopes of easing inflation have cheered investors lately, but history suggests slaying the inflation dragon may take longer than hoped.

“History lessons: how transitory is inflation?” is the title of a recent note co-authored by Research Affiliates founder Rob Arnott. It analyses the behaviour of inflation across 14 developed economies once it surges past various thresholds and examines how long it typically lingers.

Over the last 50 years, inflation, once generated, has tended to stick around. Reverting to 3 per cent inflation is “easy from 4 per cent, hard from 6 per cent, and very hard from 8 per cent or more”, says Arnott. How hard? Above 8 per cent, reverting to 3 per cent usually takes six to 20 years, with a median of over 10 years.

Arnott says the Federal Reserve’s expectations for inflation were “hopelessly behind the curve” for over a year, until recently. Even now, the Fed’s expectations regarding the speed of inflation reverting to 2 per cent remain “dangerously optimistic”. Of course, it is possible inflation will recede to 4 per cent and then 2 per cent in the next year or two, adds Arnott. However, history says it’s unlikely.