Don't Worry, the Fed Says the Recent Jump in Inflation is Transitory

The FOMC met today and promised more easy money labeling the recent inflation jump as transitory.
Author:
Publish date:
Don't Worry, It's Transitory

Fed Will Remain Accommodative

The Federal Reserve Open Market Committee (FOMC) met today and its interest rate policy unchanged.

Key FOMC Points

  • Federal Reserve will use its full range of tools to support the U.S. economy.
  • The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. 
  • Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. 
  • The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. 
  • The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved

The above snips are from the FOMC Press Release.

Inflation jumped as predicted, and so was the Fed comment about transitory.

Reflections on Transitory

Transitory Flashback

Inflation is Poised to Soar, 3% by June is "Almost Certain"

Please consider my March 12, 2021 prediction from Inflation is Poised to Soar, 3% by June is "Almost Certain"

Expect the Word Transitory

If these spike projections are accurate, expect Powell and other members of the Fed to be howling the word transitory for weeks on end. 

Transitory to What?

That comment was from yesterday.

What's Ahead For Year-Over-Year Consumer Price Inflation?

An even bigger jump in measured inflation is on the way. For details, please see What's Ahead For Year-Over-Year Consumer Price Inflation?

I strongly disagree with Powell's assessment that inflation is low.

Indeed, accurately measured, and based on home prices, I believe inflation is well over 4%. I will have a better number once I crunch the latest Case-Shiller Home Price data.

For now, note that as of March 31, Home Prices Rise at Fastest Pace in 15 Years

Hello Fed, Inflation is Rampant and Obvious

Please recall Hello Fed, Inflation is Rampant and Obvious, Why Can't You See It?

Also please note, Higher Prices at the Grocery Store as Ag Futures Surge the Most in 8 Years

Transitory or Not?

Curiously, I agree with the Fed that the spike is indeed transitory. I am not the only one, but there are very few of us.

On April 9, I commented Expect Inflation to Accelerate? Here's 8 Reasons to Expect Decelerating Inflation

In that post I quoted Lacy Hunt at Hoisington Management as follows. 

"Contrary to the conventional wisdom, disinflation is more likely than accelerating inflation. Since prices deflated in the second quarter of 2020, the annual inflation rate will move transitorily higher. Once these base effects are exhausted, cyclical, structural, and monetary considerations suggest that the inflation rate will moderate lower by year end and will undershoot the Fed Reserve’s target of 2%. The inflationary psychosis that has gripped the bond market will fade away in the face of such persistent disinflation."

Transitory Jokes

It is easy to make jokes about "transitory" but the disinflationary forces are huge.

In addition to the 6 factors Lacy noted, I added two. Then in subsequent posts I added more reasons including tax hikes and demographics.

Historical Perspective on CPI Deflations: How Damaging are They?

Finally, please consider or reconsider Historical Perspective on CPI Deflations: How Damaging are They?

A BIS Study show routine price deflation is a benefit. Central banks have not caught on.

In their attempts to fight routine consumer price deflation, while ignoring home prices and obvious speculation, central bankers create very destructive asset bubbles that eventually collapse, setting off what they should fear – asset bubble deflations.

Nearly Everyone Looking the Wrong Way

Factor in poor demographics and guess where we are. 

With nearly everyone looking for stronger inflation and higher bond yields please consider The Fed Wants to Stimulate Bank Lending, Charts Show the Fed Failed

The Fed Says "Money Doesn't Affect Inflation" Others Say "It's the Money Stupid"

Damn the bubbles and full speed ahead with accommodative policies as the Fed actually says "Money Doesn't Affect Inflation".

The Fed sponsored more bubbles that will burst and bursting bubbles combined with poor demographics are hardly inflationary.

Yes, It's transitory!  

The above discussion pertains to CPI measures of inflation not monetary inflation which is 100% certain to continue.  

That said, the demographic forces impacting prices coupled with Biden's tax hikes (something will pass) are indeed price deflationary as would be declining asset valuations.

How to Play?

Please ponder The Odd Couple, US Treasuries and Gold, Good Time to Buy Both?

Mish