U.S. Inflation Nearer 1980 Peak Than Thought, Summers Group Says

US Inflation Nearer 1980 Peak Than Thought, Summers Group Says

(Bloomberg) -- US inflation is running even closer today to its 1980 peak, fresh analysis of historical price data shows, suggesting to the authors of the study that the Federal Reserve's task of bringing price gains back to its target is similar in scale to that of then-Chair Paul Volcker.

A group of economists including former Treasury Secretary Lawrence Summers recalculated historical readings for the consumer price index to apply modern-day spending patterns, especially for housing.

After adjustments, the figures showed that core inflation ran at an estimated 9.1% in June 1980 -- versus the reported peak of 13.6%, the paper by economists Marijn A. Bolhuis, Judd N. L. Cramer and Summers said.

That means that the aggressive monetary tightening that Volcker implemented in the early 1980s brought the core inflation rate down by 5 percentage points -- not by the 11 points in the official annals. And that in turn suggests the Fed's job today is of a scale closer than previously thought to Volcker's -- which involved a deep recession.

Summers, a Harvard University professor, is a paid contributor to Bloomberg Television.

In April, the core CPI rose 6.2%. Fed policy makers target a 2% inflation rate, although that's tied to a separate gauge of prices that averages somewhat less than CPI. Economists forecast the May core CPI figure, due Friday from the Bureau of Labor Statistics, at 5.9%.

Volcker Scale

“To return to 2% core CPI inflation today will thus require nearly the same amount of disinflation as achieved under Chairman Volcker,” the researchers said in the paper published by the National Bureau of Economic Research.

Read more: Summers Sees Signs Fed Tightening Is Having Impact on US Economy

The findings may be concerning for Fed Chair Jerome Powell and his colleagues, who are trying to lower inflation without triggering a surge in unemployment like Volcker did.

Volcker's monetary tightening sent the federal funds rate up about 10 percentage points, to a peak of 20% in the early 1980s. Today, the target range is 0.75% to 1%.

The research shows similar results for the inflation experienced in the years following World War II. When placing less weight on transitory goods components -- especially food and apparel -- the peak of core CPI inflation in June 1951 fell from 7.2% to 5%, and the peak of headline CPI inflation dropped from 9.4% to 3.3%, according to the paper.

“There have been important methodological changes in the Consumer Price Index (CPI) over time,” the group wrote. “These distort comparisons of inflation from different periods.”

The panel of economists argued that the fresh look at data from the 1950s and 1980s “serve as a caution against overly optimistic forecasts of an inexpensive disinflation in the current cycle -- the disinflation that needs to be achieved now is large by historical standards.”

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