Deflating expectations

OECD Observer

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Barely a day goes by without a headline written about the end of inflation or even deflation. Looked at more closely, consumer price inflation has practically come full circle in the past 40 years, returning in the early days of the 21st century to the below 5% levels seen in the early 1960s, after spiralling into double digits in many countries in the 1970s and 1980s.

Inflation expectations also changed over the years, though. In fact the very first OECD Economic Outlook in 1967 – when inflation in all the major OECD economies was below 5% – wondered whether European countries were in danger of over-correcting the “excessive” inflationary pressures of the first half of the decade. These pressures pushed Italy’s inflation rate to 8% in 1963, for instance.

Just how high inflation could go was tested in the 1970s when the arrival of the first oil crisis compounded what the December 1973 Economic Outlook said was already an “extremely worrying” inflation picture and brought an end to “the strongest (economic) upswing since the Korean War”.

The following years saw inflation hit its highest level during the period, with Japan peaking at 23% in 1974 when the Outlook said that the effects of excessive demand buildup and the oil crisis were together “putting the economies of member countries to a test which is probably unprecedented outside of war.” By the following year economic recovery was beginning and inflation was seen “levelling out”, although the UK managed to register the highest annual inflation rate of major OECD economies over the entire 40-year period, at 23.7%.

By December 1980 when the oil price had risen 150% in the space of two years, the Economic Outlook was again warning that “the top priority for OECD countries is the reduction of inflation.” In particular it cautioned that US inflation was likely to remain “stubbornly high, at around 9-10%”, although with price rises of 13% that year the US was far from the worst performer, being outstripped by Italy with 21% and the UK with almost 18%.

When it came to the Gulf War in 1990-1991, OECD countries were less susceptible to a price shock. Inflation rose by less than many had expected, and generally stayed below 5% throughout the decade.

©OECD Observer No 235, December 2002

Economic data

GDP growth: +0.7% Q2 2017 year-on-year
Consumer price inflation: 2.3% Sept 2017 annual
Trade: +1.4% exp, +1.7% imp, Q2 2017
Unemployment: 5.7% Sept 2017
Last update: 14 Nov 2017


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