Grabbing inflation by the tail By Dr Harsh Parikh 10 May 2021 Investors concerned about renewed inflation are reminded of the Great Inflation period that began in the late 1960s when demand-led inflation picked up suddenly. In the US, with fiscal stimulus (like the Kennedy-Johnson tax cut of 1964, domestic programs for President Lyndon B. Johnson’s “Great Society” and defence spending for the Vietnam War) and easy monetary policies, by the mid-1960s the economy was at full employment with unemployment less than 4 per cent. Producers of goods and services were able to increase prices due to strong aggregate demand. The current inflation rate (headline CPI) was 2.6 per cent YOY as of March, mainly due to base effects and a rebound in energy commodity prices. However, the US TIPS’ implied five-year break-even inflation rate rose rapidly to 2.6 per cent, and the five-year, five-year inflation rate (that is, the average inflation over five years beginning five years forward) rose to 2.2 per cent, from 2.0 per cent at the beginning of this year. Inflation expectations have also been rising in developed countries beyond the US.