The Fed Is All Wrong About Inflation

Past price waves have been characterized by annual increases of as little as 0.6%. But applied over long periods, even that rate is enough to set economic expectations, to produce a strong sense that something has gone wrong, to create intolerable stress in the economy and to lead finally to a political and economic crisis.

If the history of prices is an accurate guide, we're now about 100 years into a wave that hasn't yet peaked.

David Hackett Fischer, Pulitzer Prize-winning history professor at Brandeis University, lays out the case for long periods of steadily increasing prices interrupted by briefer periods of price equilibrium in his 1996 book, The Great Wave.

What's fascinating to me about Fischer's price waves, which are very different from and much more convincing in my opinion than some long-cycle theories, is how much they explain about our current economy.

Price Waves Boiled Down

Hard to spot: In the early stages of a price wave, no one recognizes that a period of price equilibrium has ended and that a long wave of rising prices has begun. Partly, that's because the long-term upward trend in prices is obscured by short-term movements in prices such as those that the Fed manages. For example, Fischer finds that a great price wave began about 1729, with rising wheat prices in Paris, and by the early 1740s it had spread to most of Europe. At the time, people thought this was simply cyclical fluctuation in prices. But prices would rise by nearly 2% on average for the next 100 years. It wasn't until the 1760s that writers began to comment on rising prices and scarcity.

Food and fuel: All of the price waves back to the first one that Fischer examines -- the medieval wave of inflation that started in 1180 -- began with increases in the price of food and fuel. Prices of manufactured goods actually fall during the initial phases of each price wave. The explanation seems straightforward: Through history, it has been relatively difficult to increase supplies of food and fuel to meet rising demand. Expanding food production often meant farming new, less productive land. Fuel for much of human history has meant wood, and it's hard to get trees to grow faster.