A Rapid Return from Inflation
A “Bright Swan” scenario of how inflation might turn out to be a short-term phenomenon.
Photo by Margy Crane, Shutterstock
One thing the current rise of inflation has taught us is that no one is certain about the causes of inflation. The economic trends have oscillated so abruptly in the past two years, that no one can be certain about when or how they will stabilize. Yes, there is a plausible scenario that the current declines will exacerbate each other and spiral to a recession. But there is also a bright swan scenario. At least three factors exist that could turn inflation and recession around, especially if they combine together.
The first is the rate of population growth or decline. The historian David Hackett Fischer, tracking four long waves of pricing changes in Europe going back to the 12th century in his 1996 book The Great Wave, found that they all correlated with demographic change. Similar waves occurred in China, Africa, India, and the Inca Empire.
“Inflation rises with human population,” wrote Fischer. “It has through history.” And after long waves of inflation, in which food and energy prices tend to have the most debilitating effect, there are long periods of stability. Based on pricing and demographic data, he concluded that the current phase of equilibrium started in the mid-1980s. “The length this will last is unpredictable,” he told a C-SPAN interviewer in 2004. “Previously such equilibriums have lasted from 70 to 160 years. But it’s likely to be with us for a while.”
Fischer also found a correlation between pandemics and deflation. After each wave of plague in Medieval and Renaissance Europe, for instance, population declined — and often kept declining. So did prices. What if it turns out that population is declining now, more than people realize, because of falling birthrates and the effect of Covid-19? What if the economics haven’t yet caught up with the demographics?
Which brings us to the second factor that could bring back deflation. The three great causes of inflation in the past two decades have not been oil or supply chains. They’ve been housing, education, and health care. All three have played a role in our current inflation, especially housing. But what if housing prices are about to come down, because regulations are finally being relaxed?
The town council of my suburban community in Connecticut just passed a law allowing mother-in-law apartments for the first time. New York mayor Eric Adams is also proposing laws to relax zoning. Reading this, you might think I’m cherry-picking examples that prove my point — and you may be right. But there are enough signals of this movement that it could come to pass, especially as the shortage of housing stock continues. Technologies for prefabricated housing may also come into play, and the prevalence of remote work suggests that more communities may try to compete for residence by making it easier to build there.
The third factor is supply chain resilience. Around 2015, an industrial movement began to reduce dependence on manufacturing in China. This became more prevalent in the era of Trump tariffs, but there were other reasons. Some companies had struggled with keeping their intellectual property. Others wanted more sources. There is easier communication among companies along the supply chain. Innovation in manufacturing, including but not limited to digital fabrication, means that factories can be lighter, cheaper, and easier to move. The drive for sustainability means that they will increasingly be located closer to their markets. Automated vehicles may replace some container ships. Smaller, leaner, and more flexible is more beautiful.
No trend like this is certain — or absolute. But enough supply chain innovation, with enough opening up of new housing, with a lower population, could be enough to bring back the animal spirits of the 2010s. There are major new technological innovations underway, and significant venture capital behind them. Together, all this would add up to a bright swan. It would have one major downside. Those forces who consolidated the economy, leading to a few major companies dominating every sector, would be ascendant again. We would live in an uneasy bargain — a true version of “too big to fail.” They would remain dominant, in exchange for keeping inflation down and the economy afloat, as best they could. In this scenario, that would be good enough to bring back prosperity for another decade or two.
