Inflation: is it coming and should we care?

May 2021

In this brief background piece, we explore the recent history of inflation in the US, including the trend toward lower and less volatile inflation, and we discuss the reasons for this. We also briefly discuss why the inflation situation may be changing and what impact inflation may have on asset prices.

Since the 1970s, the US has had only brief periods of elevated inflation where CPI rose above 4%. These transitory periods have been associated with the first and second Iraq Wars. Moreover, inflation has averaged just 2.1% since 2000, resetting inflation expectations to a much lower plateau than what would have been estimated in previous decades.

However, such benign inflation has been the exception, rather than the rule, for much of history. The level of inflation in the US has tended to be quite volatile since World War I. And it is unusual for inflation to be so constant at such a low level, with many of the observations of 2-3% inflation occurring over the past 30 years. There are many different reasons for both the lower average level of inflation and the lower volatility of inflation, which we explore in this paper.