1947, 1970s, 2008: Inflation experts look back into history for lessons

 Central bankers know how to raise benchmark interest rates, but they have less experience in calibrating the exit from quantitative easing.

From spikes in Americans' cost of living to surge factory-gate prices in China, inflation is stirring in all corners of the globe. Monetary chieftains, meanwhile, are sticking to their guns, stressing the spurt is temporary. Investors trying to make sense of this are scouring history for the right analogies, and policymakers are scrutinizing the record for the best--and worst--approaches. Pick your era: the 1970s, the aftermath of Lehman Brothers Holdings Inc.’s collapse, or even the years after World War II. All are being parsed for lessons.

A lot hinges on getting the historical context right. Let inflation go too far, and central banks risk a downturn if they have to rein in activity too forcefully. Crackdown too soon, and miss the chance to see whether the increases are a kind of false flag, the product of a natural bounce from a bruising pandemic-induced slump. Authorities in the biggest economies say they think price rises are temporary and that inflation will stabilize at about their preferred level, generally around 2%. There’s not an awful lot of daylight between Federal Reserve Chair Jerome Powell, whose favorite word lately appears to be “transitory” and People’s Bank of China Governor Yi Gang, who said Thursday, “We must not lower our guard regarding inflation and deflation pressures from all sides.” The recent surge in producer prices partly reflects comparisons with low prices a year ago, he said. The mediocrity of inflation in the past decade has shaped this fairly patient stance. U.S. Treasury Secretary Janet Yellen, who led the Fed for four years, is sympathetic to this view, having battled disinflation herself. She told Bloomberg News last weekend that a bit more inflation would be a plus after years of lowball numbers. On the fiscal side, now Yellen's bailiwick, there's the little political appetite to rein in spending, as there was in the early years of Ronald Reagan's presidency or after 2010 when Republicans made big gains in Congress. Former Fed leader Paul Volcker’s assault on inflation in the late 1970s and early 80s was successful, but sent rates sky-high and contributed to a deep recession.