Inflation vs. Deflation – Which Is The Bigger Threat In 2022?

Inflation vs. deflation – while headlines get filled with “inflation” concerns, historical data shows “deflation” remains a threat.

The Financial Times recently had a great piece on Central Bankers and their stance that inflationary pressures remain transient. However, as FT concluded:

“For the first time in many decades, there is the possibility that a significant turning point has arrived, that price rises will be more than a flash in the pan and something more difficult to control.”

It is interesting to hear statements such as the above because inflation has been rising steadily since 1974. The chart below shows the long-term history of inflation going back to 1774.

Inflation vs. Deflation, Inflation vs. Deflation – Which Is The Bigger Threat In 2022?

What the chart shows is that in 1954 the trajectory of inflation changed. However, the annual rate of change indicates the long-term deflationary trend.

Inflation vs. Deflation, Inflation vs. Deflation – Which Is The Bigger Threat In 2022?

Notably, before 1920 the economy was primarily agriculturally based with a dramatically smaller population. Such gave rise to more variability in economic growth. However, the shift to manufacturing and industrialization minimized the big deflationary swings before WWII.