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Inflation Is a Real Problem. Remember the 1970s and 1980s.

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The consumer-price index rose at its fastest annual rate in decades in October.

Tim Boyle/Getty Images)

When I was a young reporter in the 1980s, my newspaper gave me raises twice a year for a while. I’d like to tell you I earned the salary boosts through extraordinary merit, but all the reporters got them.

The reason: The inflation rate was so high then that it was considered a hardship to go a full year between raises. Amazing, huh?

After decades of restrained prices, it’s hard to remember what it was like living in the inflationary environment of the 1970s and 1980s. Prices shot up for gasoline, groceries, housing, you name it.

The spike in energy prices was particularly painful. I was driving a 1970 full-size


Ford

that got less than 10 miles to the gallon in city driving. Filling up became a hardship. 

Unlike today, the stock market also took a pounding. Interest rates shot up, pushing monthly car and house payments to exorbitant levels. It wasn’t a fun period. 

I write this because inflation is on the march again. The Consumer Price Index rose 6.2% in October from a year earlier, its biggest increase in decades. The increase for November, to be published Friday morning, is forecast to be 6.7%.

A lot of economists think inflation will disappear when the economy completely recovers from pandemic slowdowns, and material shortages ease. I hope they’re right. 

High inflation would be bad news for lots of people, but particularly retirees who could see their savings eroded. I’m partially retired, so I’m paying particular attention. 

I did an interview in January with William Bengen, the originator of the 4% rule for retirement portfolios. The idea is that if retirees start out withdrawing 4% of their portfolio annually, increase the distribution each year by the inflation rate, and rebalance annually, their money will last at least 30 years.

The rule was published in 1994, but Bengen believes it still works except in one circumstance: high inflation. That is because the withdrawal would go up sharply every year to keep up with inflation, pressuring the portfolio itself. 

“I think of a retirement portfolio as a balloon with two holes,” Bengen told me. “One hole is the returns, and the other is what you’re taking out, and you like to have an even match. But if you have high inflation, if the amount you’re taking out gets big enough, there’s no way you can prevent that balloon from collapsing.”

Four decades ago, Federal Reserve Chair Paul Volcker wrestled inflation back into submission by jacking up short-term interest rates. It helped put the country into a nasty recession, but it worked. Inflation largely hasn’t been a problem since then.

Today, the Fed has been doing the opposite to keep the economy afloat during the pandemic. It has kept interest rates near zero.  

But the Fed is already signaling that rates are headed up. I don’t think we’re heading toward a repeat of the 1970s, yet it could get bumpy.

Both the current stock market and house values are priced for low rates.  Ask yourself how many people could afford a $1 million house if mortgage rates were 5% or 6%. A lot fewer.

For now, rates remain restrained. Investors still believe that the higher inflation will go away in a year or two. They’re probably right. Relentless global competition kept prices down until the pandemic, and it’s likely to do so again soon enough.

But inflation is a curious beast. Once awakened, it can be hard to tame. 

Write to editors@barrons.com

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