Everyone seems to be preoccupied with rising inflation nowadays. While I agree that inflation will rise over the next 1-3 years, I don't think it will even reach high-single digit levels. A return to the 1970s' double-digit inflation is extremely unlikely. In this post we're going to look at:

*We're going to look at headline inflation (including food and energy) and core inflation (excluding food and energy).

Why inflation won't rise a lot

People who think that inflation will return to 1970s-levels are forgetting a key point: the world has changed. The fundamental conditions that CAUSED double-digit inflation in the 1970s no longer exist.

Commodity price shocks

Inflation in the 1970s was largely driven by commodity price shocks. Commodity prices soared for 2 main reasons:

The commodity price-controls that had kept prices artificially suppressed for decades were lifted. This chart shows what happened to gold when price controls were lifted. Gold is representative of the entire commodities family.

But the second factor was more important: political shocks. OPEC imposed an oil embargo on the u.s. from 1973-1974. Oil prices TRIPLED in a few months because the U.S. was a big net importer of oil. (The U.S. imported 1/3 of its oil consumption).

The same thing happened in 1979-1980. Global oil supply fell 4% due to the Iranian Revolution. And since oil is an inelastic market, relatively small changes in supply/demand cause a much bigger change in the price of oil.

Note: these were 1 time EVENT driven shocks. They were not slowly moving macro trends. Slowly moving macro trends usually lead to long bull markets in oil (e.g. 2002-2008). 1 time EVENT driven shocks lead to a sudden spike in the price of oil.

Commodity price shocks are unlikely 

These MASSIVE historical commodity price shocks are unlikely to repeat in the next few years.