What's Next for
Inflation will be the biggest worldwide economic challenge in the next 20 years. Though I was young at the time, I experienced firsthand the effects of inflation during the “up” phase of the last major inflationary cycle. Think of the 1960s–1970s: The United States was fighting a war in Vietnam, President Johnson had declared a “War on Poverty,” and the world had just endured the first of many oil shocks to come – the 1973 OPEC/Arab Oil Embargo. This last inflationary cycle, which was made worse by economic policy, didn’t end until 1982. Current events are eerily similar. We have been at war with terrorists in Iraq and Afghanistan since 2001. President Obama pushed through Congress the Affordable Care Act, or ACA, and due to the extenuating circumstances of the Great Recession of 2007–2009, created the largest budget deficit in US history. All we need now to complete the analogy is an oil shock.
Inflation has an extremely long cycle. It is related to the 54-year cycle, also known as the Kondratieff cycle or the “Long Wave,” which represents the changes in prices of products over time. At this time, inflation is so benign that people don’t even think about it. In fact, some are more worried about deflation than inflation. However, all this will change in the coming years, and we all need to prepare and plan for the eventual and inevitable pendulum swing to the other side of the inflation cycle.
The question is, what is going to make that change? What will cause the deflationary pressures of low-cost products, logistical efficiencies, information technology, and low labor costs to reverse, so that inflation can start its eventual rise? The answer is – oil. The worldwide production of oil will peak this decade, after which there will be less and less of it pumped from the ground. Oil is the major lubricant of the economy. There are so many products that are petrochemical-based that it would be difficult to imagine our society running on anything else. At some point we will have to – not just imagine it but plan for it – and that transition will be long, difficult, and costly.
Since the cycle for inflation is 54 years, half the cycle is 27 years. The bottom of the current cycle occurred around 2009 (1982 + 27 = 2009). The next peak of the inflation cycle should occur around 2036 (1982 + 54 = 2036).