In a report on the history (and future) of inflation from Deutsche Bank’s Jim Reid, the credit strategist notes that while it may not feel like it, but we live in inflationary times relative to long-term history.
Before the start of the twentieth century prices generally crept higher only very slowly over time and were indeed often flat for very long periods. For example in the UK the overall price level was broadly unchanged between 1800 and 1938. However, inflation moved higher everywhere across the globe at numerous points in the twentieth century. UK prices since 1938 have increased by a multiple of 50 (+4885%) and of the 25 countries with continuous inflation data back to 1900, the UK is one of only 5 countries in the sample not to experience extreme inflation (defined as >25% YoY) in a given year. Of these 25 countries only Holland (3.0%), Canada (3.0%), the US (3.0%) and Switzerland (2.1%) have seen average annual inflation at 3% or below.
As shown in the chart below, while inflation was virtually non-existent until the 20th century, all of that changed once the Federal Reserve was created…
And while we will discuss in a follow up post Reid’s observations on just “what changed in the twentieth century”, below we list some “fascinatingf stats” about inflation as we thank the central bankers for unleashing this most powerful economic force on the face of the planet.
From Deutsche Bank:
- No country has seen average annual inflation below 2% since 1971 when we moved to a global fiat currency system (87 in our sample), only 28 averaged less than 5%. No country has seen annual average inflation below 2% since 1900 (25 in our sample) and only 4 between 2-3%.
- UK prices (longest history we have) were more or less unchanged between 1800 and 1938 but have subsequently risen by a stunning multiple of 50 times (4885%) in the 80 years since this point. In the 728 years between 1210 and 1938 prices only rose 26 times.
- 1980-1999 was the peak period in financial history for hyperinflations followed by the WWII period.
- UK house prices (longest asset price series we have) took 649 years for nominal prices to rise 887% up until 1939 (0.4% annualised). However in the last 79 years, prices have risen 41,363% (8% annualised). As the real adjusted series shows, this is not simply an inflation story.
- Between 1290 and 1939, the real adjusted price of a UK house actually fell -49% over the 649 year period. In the last 79 years real prices have climbed 834% (3% annualised).
- Despite the current impressive US equity bull market, this half century (2000-2018) so far is seeing the weakest average nominal and real US equity returns on record. The annualised numbers for each half century are 6.98% (1800-1850), 7.82% (1850-1900), 7.39% (1900-1950), 13.55% (1950-2000), and 5.64% (2000-18) nominal and 7.48% (1800-1850), 7.07%, 4.91%, 9.17% and 3.45% (2000-2018) real.
- The 1950-2000 period was unique for inflation, asset prices and population growth. World population grew 142% in this period and from 2.5bn to 6.1bn. 1968 was the peak year in history for global population growth (+2.09%). 2018 is expected to see this growth rate fall below 1.1% for the first time since annual data was estimated from 1950 onwards. Going forward, on central UN forecasts, this annual rate is expected to be 0.53% by 2050 and then around 0.10% by 2099.
- The following series shows the number of years population took to double between 5000BC and 2004; 2000, 2000, 800, 1300, 660, 140, 63, and 41 years (1963-2004). If you based future world population growth on the UN forecasts between 2050-2099 and extrapolate the trend growth rate beyond 2100 then the next doubling will only take place as you approach the year infinity. Obviously much can change but it’s unlikely that we will see a doubling of the global population in the lifetime of anyone reading this report if at all ever again.
- If we mean revert all US assets in our study they will all see negative average annualised real returns over the next decade. So “this time is different/new paradigm” vs “mean reversion” will be key to predicting the next decade of returns.