Learning from three disinflations
Germany’s historical experience provides a template for what happens next
Germany’s experience following sharp core inflation accelerations over the past fifty years provides a reminder that disinflation takes time and need not be a smooth process.
OVER THE PAST fifty years, Germany has experienced three periods when core inflation accelerated above 5%YoY; naturally, each was followed by a period of disinflation. A fourth now follows the pandemic. Given the Bundesbank’s reputation for inflation fighting, we might wonder how these disinflations played out and what might be learned.
For historical Core inflation here, we use OECD CPI ex. food and energy index.
These three such disinflation episodes were each about a decade apart, as in the chart below. The first oil shock and end of Bretton Woods period (with a peak YoY% in June 1973); the second oil shock and Volcker-Bundesbank disinflation episode (peak in Oct. 1981); the post-reunification period and gulf war (peak May 1992.)
The latter two disinflations perhaps represent something the ECB hopes to emulate today. The first will be an experience they hope to avoid since disinflation then sawa “double peak” in core. We previously drew lessons from that experience here.