The Kondratieff Cycle (the inflation cycle length)

Inflation runs in a 54-year cycle known as the Kondratieff cycle, or the “Long Wave,” which represents the changes in prices of products over time. Nikolai Kondratieff, a Russian economist of the 1920s, wrote several papers dealing with the question of long economic cycles. In his book, aptly titled Long Economic Cycles, he showed how several indices, such as commodity prices, interest rates, wages, and foreign trade, vary over time. From this data, a consistent and repeatable form emerged – a cyclical pattern of consistent length. This curve came to be known as the Kondratieff wave.

Kondratieff noted four empirical patterns in the long wave that are described in his book Long Economic Cycles. The first pattern has to do with technological change and the initial development and experimentation of a new idea or invention, which is associated with the upward phase of the cycle. The second pattern has to do with the competition of resources due to the technological change and the conflicts or wars over those resources. In addition, there is social unrest or upheaval caused by the technological change and this pattern is also associated with the upward phase of the cycle. The third pattern is that there is a significant reduction in agricultural and commodity prices associated with the initital downward phase of the long cycle. The fourth pattern that Kondratieff identified is that the downward phase of the long cycle is associated with depression and deflation.[1]

Because of the long length of the inflationary cycle, people have a hard time relating to it. It takes more than a generation for the down cycle, when prices are declining, and people think that inflation has gone away. “So strong was the decline of prices by 1996 that several leading economists asserted that the age of inflation was at an end.”[2] However, this is just the typical rear-view-mirror perspective of any person who is trying to predict the future by extrapolating the recent past. It does not work. Everything in life has a cycle, and the next phase of Kondratieff’s Long Wave will be the upswing of the inflation cycle.

The Long Wave should also be considered when thinking about the global effects of change. As businesses and economies become more interconnected and integrated in all industries, the “butterfly effect” should be considered: What seems like a small and simple thing could have huge effects if leveraged over multiple years or hundreds of thousands of business decisions. And since the Kondratieff wave is so long and takes so many years to fully develop, the changes introduced or forced upon the public by these events can have unforeseen and unintended consequences. For example, a replacement technology for the reciprocating engine, due to some advance in fuel, power, or energy, could completely disrupt the current auto industry and put multiple thousands of people out of work. Depending on the type of advance, it could be hundreds of thousands. This would have a significant effect on the economy .

Here is a graphic of the Kondratieff wave, courtesy of A. Gary Shilling & Co, Inc.

[1] The Long Wave Cycle, by Nikolai Kondratieff, as translated by Gary Daniels, 1984, Richardson & Snyder Publishing

[2] The Great Wave, Price Revolutions and the Rhythm of History, by David Hackett Fischer, 1996, Oxford University Press, Inc., New York, New York, page 233