Inflation: A Transitory Burst or Something Worse?

Gary Campbell CFA®, Investment Specialist


In October, the Department of Labor reported that the inflation rate in the US had increased to 6.2%. This is the largest 12-month increase since 1990, and the fifth straight month of inflation above 5%. As a result, consumers are faced with widespread and sizable price increases for everything from groceries to cars, and many are wondering why inflation has climbed to current levels and whether this is the new normal.

First, it is important to understand that what we read in the news are short-term measures of inflation.

Today’s prospect of rising inflation makes me recall my first job 45 years ago in the field of investment management. I was fresh out of college working as a portfolio manager for a small bank trust department in Riviera Beach, Florida. While inflation was a topic I’d studied in several economics classes, I did not anticipate how severely it would impact my clients’ portfolios. Inflation threatened to erode the value of my client’s retirement assets and permanently reduce their standard of living. Looking back at this period helps us evaluate today’s indicators of potential inflation by reminding us what historically causes harmful long-term inflation.

The inflation I experienced (over 12% as measured by the CPI) early in my career was the result of several complex causes dating over 20 years. In 1960 the Federal Reserve engaged in some limited monetary tightening. Richard Nixon blamed his presidential election loss on this policy. After Nixon was elected President in 1968, he selected a new Fed Chairman (Arthur Burns). Under Burns, the Fed succumbed to political influence and adopted an “accommodative” monetary policy, failing to proactively assert the sort of monetary discipline over a growing money supply that Nixon loathed. As a result, the money supply grew. This condition, which was exacerbated by the 1974 Arab Oil Embargo, led to historically high inflation rates. By 1979, the U.S. was mired in a vicious cycle of the worst kind of inflation (inflation topped out at 14.8% in 1980). The Federal Reserve determined to right the ship by raising interest rates to historic levels. In that period, the prime rate rose to 21.5%. While the economic impacts of this action took a significant toll on jobs and business conditions, the measures worked.

Circumstances today are clearly not the same. But what are the reasons we have seen inflation climb to the current levels? It is important to understand that what we read in the news are short-term measures of inflation. While prices at the pump and on store shelves are higher, keep in mind that over the past year and a half, businesses took a direct hit from the pandemic and are just now restoring prices they previously slashed. Thus, while one-year measures of inflation are very high, the average inflation experienced over the past two years is much lower.  It is typical for inflation to accelerate on the way out of a business slowdown, such as the one we have experienced due to COVID-19.  In addition, there is a disconnect between demand and supply (high demand coupled with shortages in certain manufactured goods) created by disruptions in the global supply chain. All of these conditions are likely temporary. For these reasons, it is wise to conclude that current levels of inflation are transitory.  As the pandemic continues to fade, I believe inflation will fade along with it.


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