Inflation: long-term cycle and coming dynamics | Economy

Inflation: long-term cycle and coming dynamics | Economy

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Article intially published on rochegrup.com.

US inflation from 1785 to 2020

The deep structure of economy is cyclical, as if human interactions would be comparable to a system of cumulative responses, repeating over and over. Inflation doesn’t derogate to this rule. Inflation (or deflation) is generally a sign of economic volatility, which means a distortion between global demand and global offer. In my book on GOLD AND SILVER, I explained my theory of the “cycle of predominance of offer and demand”. At a certain point, there are periods when instituted economic equilibrium will produce cumulative tensions on offer or demand. It results in a short and brief change in the cycle of predominance, and consequently a major gap between offer and demand, and finally a change in prices.

Price Cycles…

A statistical analysis from lows to lows tends to show the implicit recurrence of two main cycles: a 9 years (or 8.6) cycle and an 18 years (or 17.2) years cycle [see my article on the 8.6 years cycle].  Indeed, we can refer to the study of Brian Berry on the price cycle [see book]. Major price peaks have occurred in 1814, 1864, 1920, 1974. The average long-term cycle is around 52/53 years. Berry saw the recurrence of a 54 years cycle. If we apply such a model (dividing by three and six cycles), we actually find major correlations with price moves. Nevertheless, we can develop a little bit further this analysis. A 51.6 years model cycle seems to be even more accurate. The following graphic shows detailed inflation on selected periods.

On each graphic, we have the repetition of a simple pattern: three waves up/three waves down. We also notice an intermediary major peak, followed by a major disinflation, and generally, deflation. This is the famous “Kondratieff peak”. The repetition of such a pattern indicates the persistence of main cycles. The approach proposed until now is to divide a 54 years cycle in three waves of 18 years or six waves of 9 years [Juglar Cycle], as shown below. Nevertheless, cycles correlations with prices can be improved.

PRICE PROJECTIONS

The graphic above shows my new approach for statistical data on inflation. There is on long-term cycle about 52 years. Divided it by three, you get a 17.2 years cycle, which is 2 cycles of 8.6 years. The combination of these cycles is modelized in this graphic, also available on my website (www.andrieuthomas.com). The correlation with prices is extremely evident for the XX and XXI centuries. We conclude here in three dynamics:

  • Firstly, the 2020 deflation has normally occurred. Which confirms, once again, that the 2020 recession is completely cyclical and not linearly “exogenous”! Since 2016/2017, we entered into a wave of economic slow. It has encouraged signals of a coming crisis like the stabilization of interest rate or the extreme diminution of economic volatility. The next (lower) time target was necessary 2020.
  • Secondly, as I explained in 2019, the 2020/2021 predictable recession would result in shortages and inflation on commodities. We have to remember that the highest average rate of inflation is due to commodity prices. As a result, the following inflation by 2021 (as predicted), is the consequence of shortages. The study on the main price cycles confirms our view that inflation will generally persist until 2025/2026, which is extremely correlated with the interest rate cycles studies [see article]. From another point of view, we could say that growth will return and that economic risks will tend to diminish on the next years.
  • We should enter in a period of maladjustments between offer and demand until 2034. Structural inflation is now changing, due to strong moves of conjunctural inflation [see article]. It also confirms the major economic risk that should persist around 2032 and 2037. In other words, disinflationary equilibrium we knew from 1981 won’t last continually in the next 15 years. Finally, a significant peak in inflation can be a sign of coming war: 1813 Napoleonic war, 1864 civil war, 1916 WWI, 1974 Vietnam war and oil choc, etc.

Growth behind inflation…

Growth is generally associated to economic expansions. Simply written, growth and inflation are partly correlated. The graphic above shows the World Annual GDP growth. The average trend is defined by the following equation: y = -0.0453x+4.875. By resolution, a continuity of the observed trend in the last 60 years should lead to an average world growth of 0%, around 2067.

This approach is extremely correlated with demographic projections, public debt impact, and productivity evolution. Furthermore, we will note that the potential growth for Japan and Europe on this decade is around 0%. On the long term, a slow in economic growth should lead to a slow in inflation. Moreover, as shown in the previous graphic, we will note that the 2060-2065 period could be marked by strong pressures on growth and prices.

We enter in a new economic area!

By Thomas Andrieu | AUTHOR AND REDACTOR

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