What’s Next for Inflation?

What will we see in the future, relative to inflation? Edward Dewey and Edwin Dakin predicted that U. S. Wholesale Prices would peak in 1982, which corresponds to the peak of the last major inflation wave.[1] Since this book was written in 1947, it is amazing to me how accurate that prediction was. And since 1982, there has been a reduction in prices, per the predictive curve. In fact, “… the rate of price inflation has been falling on average for 27 years.”[2] This also tells me that the lowest point in prices (deflation) should have been in 2009 and that the next peak in the prices of products (inflation) will be in 2036.

The question is, what is going to spur 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.

There is a well-known prediction called “Hubbert’s Peak,” which relates to the declining rate at which oil would be produced from wells within the United States. M. King Hubbert, a Shell Oil geophysicist, forecasted in the 1950s that this would occur around 1970. He was correct. What we found out from the oil crisis in 1973 was that the US could no longer simply increase the production of domestic oil to offset the reduction in the availability of foreign oil. So we have been at the mercy of price-setting by the Middle East oil cartels.

What will happen when the worldwide Hubbert’s Peak occurs? In Out of Gas, David Goodstein states: “One certain effect will be steep inflation, because gasoline, along with everything made from petrochemicals and everything that has to be transported, will suddenly cost more.”[3] An oil shock is the only thing necessary to replicate the conditions of the last inflationary episode in our Nation’s history, the Great Inflation. I expect this oil shock to occur this decade, and the repercussions will be severe. At some point in the near future, we will reach the worldwide peak production of oil. After this date, any global event that requires a surge of additional oil reserves to compensate – whether that be a war, a natural disaster, a collusion of oil-producing countries cutting total output, or some other cause – will reveal that there will be no way to react to that need, and hence there will be an oil shock.

As you can see in the graph of the inflation cycle below, we are now on our way to the upward phase of the inflation cycle, which will peak (the next peak is not shown in this graph) in 2036.

The Inflation Cycle graphic

[1] Cycles: The Science of Prediction, by Edward R. Dewey and Edwin F. Dakin, 1947, Henry Holt and Company, Inc., New York, New York, pages 96-97

[2] The Great Reflation, How Investors Can Profit from the New World of Money, by J. Anthony Boeckh, 2010, John Wiley & Sons, Inc., Hoboken, New Jersey, page 84

[3] Out of Gas, The End of the Age of Oil, by David Goodstein, 2004, W. W. Norton & Company, Inc., New York, New York, page 18