“Transitory inflation” will not prove transitory
In this article, Lyn Alden tacitly advises us to expect the “transitory inflation” rates the Fed talks about these days to remain.
Unlike the Fed, that fails to clearly define its terms, Alden distinguishes between (1) transitory inflation that results from temporary supply constraints (the recent lumber shortage) and (2) transitory inflation that results from an influx of new money put into the system without a corresponding increase in available goods.
In both cases, we see brief inflation spikes. However in the case of supply constraints (lumber) the price spike abates when the scarce good becomes available again. Clearly, that’s a transitory inflation spike.
But the sudden change in the rate of inflation can be called temporary only because the changes to the rate of inflation’s growth don’t continue month after month or quarter after quarter.
For example, following a stimulus injection we might see what the Fed calls a transitory spike in inflation in the year-over-year comparison – say it was 1.5% year-over-year before the month of new money being added, then spiked to 2.75% year-over-year in the month of stimulus. Since in the following month there is no additional stimulus, the hypothetical 2.75% year-over-year rate will drop back down to the hypothetical 1.5% or, perhaps because of some residual effects, 1.8%. In either case, the Fed can claim there was only a transitory spike while in reality there is more absolute money in the system, and more money chasing the same quantity of goods produces a higher overall cost of goods in the marketplace.
The current inflationary spike that we’re seeing in 2021 is being dismissed as being caused by supply shocks. But of course, all inflationary events involve supply shocks. That’s one of the inherent catalysts of why inflation happens, every time.
The 1940s had all sorts of war-related commodity and labor shortages. The 1970s had the oil embargo. The 2020s have semiconductor shortages, various commodity shortages, and shipping constraints.
External/accidental supply shocks on their own eventually result in prices returning to normal, when the anomalous supply shock is resolved. They involve specific goods/services.
On the other hand, rapid increases in the broad money supply that boost demand for goods and services without boosting the supply of goods and services, result in supply shocks and cause price inflation. As the market adjusts over time, this price inflation becomes transitory in rate of change terms, but with prices that ultimately settle at a higher level, due to more money permanently being in the system. This second type of inflation is likely what we’re experiencing at this time.
Some specific parabolic price levels will almost certainly come back down pretty far. Lumber’s extreme price behavior, for example, is due to an acute sawmill bottleneck.
However, many prices are unlikely to revert back to where they were pre-2021. Many companies including Procter and Gamble (PG) and Coca Cola (KO) are raising prices due to higher input costs. Many commodities such as copper are unlikely to fully retrace their 2020/2021 gains. Chipotle (CMG) is unlikely to reverse the shift towards $15 average wages once it implements them. These are higher equilibrium levels, with a lot more money in the system.
Alden, Fiscal-Driven Inflation (May 16, 2021)
Fantastic article VT, many thanks.
Alden may have changed my perspective on inflation. I’ve seen her on many podcasts but never read her articles. I have a thing for smart women (my DNA knows I’m stupid and is looking for an upgrade) and I think I’m in love, lol.
I think her 1940’s analog is spot on.
Thanks again for the link.
Anyone who thinks inflation is transitory clearly isn’t paying attention. Inflation has been and will continue to be unrelenting.
In 1970 I bought a house for $24,000, a mid size car cost $2,300 and gas was $0.35/gallon. All of those things and most everything else cost at least 10 times more in 2021.
If you had put $2,300 in Federal Reserve notes under your mattress in 1970, hoping to buy the latest model car in 2020, you would be bitterly disappointed. Why? Because inflation caused by the Fed had effectively stolen 90% of the purchasing power of your money right out from under you while you slept.
been hearing reading both sides of inflation is or isn’t it transitory
this is best articulation i have seen
eventually the masses are going to feel the pain of consistently higher prices many everyday items and their standard of living will take a hit.
home prices up 25% , tax assessment goes up, taxes on home go up permanently and that is w/o any increase in the actual tax rate
Thanks VT. Half the trick is to bring the words of trusted analysts to this forum. And that is a treasure trove to those who are already deep into a topic.
And to abbreviate the writing by extracting the conclusions and most incisive quotes for those who skim long articles.
Knowing the trusted analysts in a field is a form of expertise. So thanks again for this VT.