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History Rhymes

Updated: Nov 15, 2023

Mark Twain once said, "History never repeats itself, but it does often rhyme." There are many similarities between the US of the 1970s and today. In the 1970s, the United States was battling high inflation, as we are today. Inflation from 1965 to the end of 1981 averaged more than 7% annually, peaking at nearly 13% in 1979 and 1980.

Before the 1960s, inflation was rarely a problem. John F. Kennedy was elected president in 1960, and his goal was to reignite the US economy by implementing tax cuts. President Lyndon B. Johnson ultimately signed the Tax Reduction Act in 1964. In addition to tax cuts, the United States began spending heavily on the Vietnam War and Great Society Programs, such as Medicaid and Medicare. The tax cuts and increased government spending spurred economic growth, and unemployment dropped to 3.5%. As a result, low unemployment increased wage growth, which is considered "sticky inflation." Oil prices quadrupled when Arab nations cut off oil supplies in response to the Yom Kippur War between Israel and a coalition of Arab states led by Egypt and Syria in 1973. The Iranian revolution 1979 disrupted oil supplies, which again caused the prices to increase dramatically.

Similarly, President Donald Trump reduced our taxes in 2017, Vietnam War spending was replaced with COVID-19 spending, Ukraine/Israeli war spending, and Great Society Programs were replaced by the Inflation Reduction Act (IRA). The current unemployment rate is also at ~3.5%. Furthermore, OPEC and Russia cut oil production by 1 million barrels per day to support a higher price.

The chart above compares inflation in the 1970s to current inflation, with the S&P 500 overlayed into the chart. Inflation is currently hovering around 4%. I believe the Federal Reserve Bank has learned from history. They are going to do all they can do to bring inflation down. Has the government learned to reduce spending?

Consumer Price Index is Promising

The US stock market has been surging the last few days as inflation appears to be subsiding. The consumer price index (CPI) shows that inflation has dropped substantially over the previous six months to 3.2%, near the Feds target of 2%. Federal Reserve Chairman Powell has stated that he will increase rates if necessary. For now, he believes the central bank faces nearly equal risks of raising its benchmark rate too high, which could derail the economy, or not raising it high enough, which could allow inflation to persist or worsen. So basically, this means he’s in a wait-and-see mode.

I feel that inflation will be above 2% for at least another two years. However, I don’t think the Fed will substantially increase rates in 2024, as it’s an election year. Unfortunately, reduced government spending is necessary to lower inflation to 2% without breaking other parts of the economy. Let’s hope our elected officials understand this and inflation doesn’t return as it did in the 1980s.

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