Niall Ferguson
Olivia Michael | CNBC
Inflation could repeat the trajectory of the late 1960s, which laid the groundwork for sustained high inflation over the next decade, according to top economic historian Niall Ferguson.
Speaking to CNBC on Friday, Ferguson said that as a result of responding to the Covid-19 pandemic in a manner similar to the 2008 global financial crisis, policymakers were now facing a new challenge in the form of an increase in inflation.
“What’s interesting about disasters is that one can lead to another. You can go from a public health disaster to a fiscal, monetary, and potentially inflationary disaster,” Ferguson told the Ambrosetti Forum in Italy.
“It’s not such a big disaster, it doesn’t kill people, but rising inflation would be a problem.”
US consumer prices rose 5.4% in July from a year earlier, the biggest jump since August 2008.
The U.S. Federal Reserve and many economists argue that the recent rise in inflation will be “transient,” but Ferguson questioned that.
“How long is it transitory? At what point do expectations fundamentally change, especially if the Federal Reserve tells people, ‘We’ve changed our inflation-oriented regime and we don’t care if inflation goes above and beyond.’ goal for a while? ”Ferguson, who is a senior member of the Milbank family at Hoover Institution, Stanford University, said.
“My sense is that we’re not going into the 1970s, but we could run it again in the late 1960s, when the famous Fed chairman McChesney Martin lost control of inflation expectations.”
His comments come after former IMF chief economist and Harvard professor of public policy Kenneth Rogoff suggested in an article earlier this week that the U.S. withdrawal from Afghanistan had been added to the list of “disturbing” parallels between the 2020s and the “perfect storm”. of factors that caused very high inflation in the 1970s.
Ferguson suggested that the high inflation of the 1970s had its origins in the late 1960s, adding that it was too early to conclude with confidence that current warming is transient.
Data released Tuesday on U.S. home prices and consumer inflation expectations may have added to the Fed’s concerns. The S & P / Case-Shiller index, which measures house prices in the top 20 U.S. cities, rose 19.1% year-on-year in June, the biggest jump in series history going back in 1987. Meanwhile, a Conference Board survey showed U.S. consumers see inflation now running at 6.8% in 12 months. This is a full percentage point over a year ago, or 17.2% on a relative basis.
Former Treasury Secretary Larry Summers tweeted: “Whenever you feel that inflation is transitory, remember that double house price inflation has not yet appeared in the indices. Housing accounts for 40 per cent. hundred of the basic CPI [consumer price index]. “
Ferguson suggested that the Delta Covid-19 variant might have done the Fed a favor by slightly cooling the U.S. economy after a hot summer, but other external factors could still come into play.
“Great inflation in history has almost always been related to war. What would really derail inflation expectations would be if this cold war … between the United States and China became a hot war, for example , about Taiwan, “he said.
Ferguson speculated that in light of the U.S. withdrawal from Afghanistan, Chinese President Xi Jinping could see emerging U.S. reluctance over the military conflict as an opportunity to try to take full control of Taiwan. This would force the United States to make a decision on whether to enter another distant war or cede its world domination, he suggested.
– CNBC’s Jeff Cox contributed to this report.