The Big Idea

The anatomy of past inflation

and | May 7, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

The last time core PCE ran above 2.5% year-over-year was 2006. The last time it exceeded 3% was 1992.  While current inflation has not reached those levels yet, it may later this year as pandemic lifts and the supply side of the economy struggles to keep up with explosive demand. ISM manufacturing and non-manufacturing prices surged in April to rare heights.  A brief rundown of circumstances in previous episodes when these input price measures were higher offers useful perspective on the anatomy of surging inflation.

ISM prices gauges

The ISM manufacturing survey is a rich source of quantitative and anecdotal evidence on the economy, especially because it has such a long history, going all the way back to 1948.  The prices gauge, which measures respondents’ input prices, thus offers a nearly 75-year perspective on inflation conditions, at least for the goods portion of the economy.  The 89.6 reading in April was the highest since 2008 (Exhibit 1).  Moreover, it was a level eclipsed only in a handful of episodes in 1950, 1973 to 1974, 1979 and 2008.

Exhibit 1: ISM manufacturing prices index

Source: ISM.

The ISM non-manufacturing survey only goes back to 1997, so the historical perspective is not nearly as extensive.  Nonetheless, it covers the bulk of the last 30 years, during which core consumer price inflation has been tame.  The April reading for the prices gauge of this survey came in at 76.8, a level only surpassed four times in the nearly 25-year history of the series: twice in 2005 and twice in 2008 (Exhibit 2).

Exhibit 2: ISM non-manufacturing prices index

Source: ISM.

A brief inflation history

Here is a brief description of the five episodes when one or both of the ISM price gauges was higher than the April readings.

In 2008. For most, 2008 is remembered for the Global Financial Crisis in the fall.  Before Lehman and AIG went under and Fannie Mae and Freddie Mac went into conservatorship, the economy seemed on shaky ground but was hanging in decently.  However, inflation looked like a serious issue, mainly due to a spike in oil prices.  In fact, oil prices reached an all-time high—and by a long shot—that year.  At its peak in the summer of 2008, the WTI oil futures price reached $145 a barrel, more than $30 higher than the peak in any other year (Exhibit 3).  Both ISM price indices exceeded their April 2021 levels for two months, just as oil prices were hitting that high.

Exhibit 3: Oil prices through 2008

Source: Bloomberg.

However, from an inflation perspective, 2008 was a 1-trick pony.  While oil prices were pushing input prices higher for the vast majority of firms and also led to a spike in headline consumer prices, the core PCE deflator never exceeded 2.3% that year, lower than the peak reading in 2006 and 2007.

In 2005. The 2005 episode was tied closely to oil as well but in a different way.  Hurricane Katrina blasted the Gulf of Mexico in the summer of 2005, knocking much of the U.S. refining and petrochemical industry capacity offline, in the case of many plants for months, as well as shuttering much offshore oil and gas extraction.  A month later, Hurricane Rita slammed the Houston area, creating further chaos.  Oil prices jumped, energy-related input prices spiked briefly, and the headline PCE deflator jumped to nearly a 4% year-over-year advance, but, as in 2008, the core inflation measure barely budged, holding in a range of between 2% and 2.25%.

In 1979. This is an episode we surely do not want to revisit.  Inflation was well on its way toward the double-digit crescendo seen in the early 1980s, exacerbated that year by the second oil crisis.  The Iranian revolution led to a drop in global oil production, and, shortly thereafter, the Carter Administration deregulated oil prices, which had been left constrained even after the Nixon wage and price controls of the early 1970s were lifted.  The price of oil jumped from $16 per barrel to almost $40 per barrel in less than a year.

While the ISM manufacturing prices index only exceeded April’s 89.6 reading once in that period, in July 1979, it was above 80 for nearly two years straight, from May 1978 to March 1980.  The price pressures in the economy, unlike in 2005 and 2008, were pervasive, as both headline and core PCE deflators were running in the 6% to 7% range.

In 1973. The 1973 oil embargo led to one of the deepest recessions in post-war history as well as a spike in inflation.  OPEC proclaimed an oil embargo against countries perceived as supporting Israel during the Yom Kippur War, including the U.S., in October 1973.  The embargo lasted until March 1974.  Over that same general period, the ISM prices index exceeded 90 for nine straight months (September 1973-May 1974).  Back then, oil was a much more integral part of the economy, and there was no prospect, as was the case in 2005 and 2008, of an isolated oil price shock.  Both headline and core inflation quickly spiked above 10%.

In 1950. It is an awfully long time ago, but there are some parallels to 1950.  The demobilization after the end of World War II was widely feared to push the U.S. economy back into depression.  Between that fear and the shadow of massive federal debt incurred in fighting the war, the Federal Reserve cooperated with Treasury to keep interest rates very low in the post-war years (the Fed only negotiated its independence back in 1951, after the 1950 inflation spike).  As it turns out, the economy boomed, and inflation spiked in 1947.  A few years later, the Korean War broke out in 1950, and commodity prices shot up, as people expected World War III.  The ISM prices index held above 80 for 11 straight months in 1950 and 1951, including four readings above 90 and the only “perfect” 100 reading in the history of the series, in June 1950.  Consumer price inflation after World War II spiked to around 10% in 1947, briefly dipped in 1948, and then shot up again in 1950, reaching nearly 10% again.  Thankfully, the Korean War did not lead to another global conflagration, and inflation eventually settled back down


There is good news and bad news from these past instances of strong inflation.  The good news is that, with the exception of the 1950 period, every one of the past episodes examined above were driven in part or entirely by oil shocks.  The big difference between the 1970s oil shocks and those of 2005 and 2008 is that in the latter case, inflation expectations were well-anchored, as the Fed likes to say, and thus people were confident that inflation would subside.  The optimistic view would be that steady inflation expectations will allow the economy to navigate through what, like oil shocks in the past, should be a temporary phenomenon, supply constraints caused by the pandemic.

The reason to be more concerned today than in the 2005 and 2008 episodes is that upward cost pressures are not limited to the petroleum complex.  Rather, commodities across virtually every major group (metals, lumber, food, oil, etc.) are shooting higher.  In addition, firms are reporting that they are having to dramatically boost wages to entice workers back into the labor force.  Inflation pressures are hitting from virtually every angle, more like what we saw in the post-war years of the late 1940s and early 1950s.  Moreover, thanks to aggressive fiscal and monetary policy, households are flush with cash, and the acquiescence to price hikes in recent months seems much different than the relentless drive by consumers for the lowest possible prices all through the 2000s and 2010s.  The fear is that inflation expectations may not in fact be quite as well-anchored as the Fed would like to believe.

In the end, there has been no experience quite like what we have undergone over the past 15 months, so there is no perfect historical parallel.  As Fed officials continue to insist that price pressures will prove transitory, it remains to be seen how this episode will be treated decades from now, when a new generation of economists and financial market participants look for insight from the past.

admin 1 (646) 776-7714

Stephen Stanley
1 (203) 428-2556

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at

Important Disclaimers

Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles