Investor Essentials Daily

Glimpsing the future economy through post-WW2 America

February 12, 2024

The latest Core Personal Consumption Expenditures (“PCE”) data indicates a slowdown in inflation, with Core PCE at 2.9% and total PCE at 2.6%, suggesting that the intense inflationary period of 2022 and into 2023 is easing.

This trend is seen as positive, reducing fears of wage-price spirals and hyperinflation, and is compared to the economic recovery post-World War II.

The historical context shows that after the war, pent-up consumer demand led to a spike in inflation, which was effectively managed by monetary policy, illustrating the potential for current inflation pressures to be temporary.

The current situation mirrors the post-war era, with supply and demand imbalances due to the COVID-19 pandemic driving inflation, but with adjustments underway that could lead to stabilization, despite the risk of a minor recession similar to that of 1949.

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Price jumps are finally beginning to slow down…

The latest data from Core Personal Consumption Expenditures (PCE) presents an optimistic picture, indicating a slowdown in inflation rates.

With Core PCE at 2.9% and total PCE at 2.6%, the intense inflationary period that dominated discussions throughout 2022 and into 2023 is showing signs of subsiding.

This development is particularly encouraging as it alleviates concerns ranging from wage-price spirals to hyperinflation, which many fear could destabilize the economy as we advance into 2024.

The reduction in inflation rates is reminiscent of the economic resurgence following World War II, suggesting a promising path toward economic stability.

Reflecting on the late 1940s, the post-World War II era offers valuable insights into our current economic landscape.

During the war, economies were predominantly focused on military production, leading to rationing and high savings due to the scarcity of consumer goods. This pent-up financial capacity exploded into consumer spending post-war, escalating demand beyond the supply and driving inflation.

By 1946 and 1947, inflation had soared to 20%, but this spike was short-lived. Effective monetary policies by the Federal Reserve managed to temper inflation, bringing it down to more manageable levels within two years, showcasing the power of monetary policy in economic regulation.

This rapid adjustment was a testament to the effectiveness of monetary policy in controlling inflation, even in the face of significant economic shifts.

History is known to repeat itself…

When we compare this historical scenario to the inflation trends from 2020 to the present, there are striking similarities.

The COVID-19 pandemic led to unprecedented global economic disruption, resulting in supply chain issues and a surge in demand as economies reopened.

Like the late 1940s, this combination drove inflation rates higher, peaking at around 10% in some regions, which—while not as extreme as the post-war period—represents a significant spike by modern standards.

If we take a moment to compare a chart of inflation from the late 1940s to the period from 2020 to the present, we’ll notice a striking resemblance in the trends.

Despite a difference in the peak inflation rates—8% recently compared to 18% in the post-war era—the patterns are notably similar.

Following the initial surge in the 1940s, inflation rates began to fall, even flirting with deflation.

The key driver behind both of these inflationary periods was a mismatch between supply and demand. In the late 1940s, the economy adjusted as supply chains caught up and consumer spending stabilized.

We are beginning to see similar adjustments today, with supply chain issues gradually resolving and demand normalizing.

This adjustment gives us a reason to be optimistic that the current inflationary pressures may be temporary and that inflation rates will begin to fall back to target levels.

However, it’s also crucial to note that the resolution of post-war inflation coincided with a minor recession in 1949.

This historical precedent serves as a reminder that the process of economic adjustment can lead to periods of contraction.

The minor recession of 1949 was a brief and relatively mild contraction, but as we navigate the post-pandemic economic landscape, it’s essential to not turn a blind eye to signs of a potential downturn.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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