The Case for “Transitory” Loses Ground

For much of the year, we have listened to Federal Reserve officials argue that the surge in inflation is “transitory.” Transitory simply means temporary. Yet, the latest inflation numbers suggest the Fed’s line of reasoning is losing some of its punch.

In October, the Consumer Price Index rose 6.2% versus one year ago, according to the U.S. Bureau of Labor Statistics. Yank out food and energy and the core CPI rose 4.6%. Both were the highest readings in 30 years—see Figure 1.

On a monthly basis, the CPI was up 0.9%, while the core CPI rose 0.6%.

In the late 2000s, the rise in inflation was due primarily to soaring gasoline prices. While energy costs are up sharply, today’s increases are much more broad-based.

Categories that fall under services have lagged but are starting to show signs of heating up. However, it has been the price of everyday goods that have jumped sharply.

Even if we remove used cars (up 26% versus one-year ago), we have been experiencing sharp increases in the price of goods—see Figure 2.

Against the backdrop of cheap money, it mostly boils down to a few of items. Pandemic stimulus has lifted spending on goods and fueled demand at a time when production bottlenecks are hampering the supply of goods. The result: prices are going up.

While we experienced a lull in Q3 economic growth, activity has accelerated sharply as Q4 gets underway. Yet, the University of Michigan’s consumer sentiment survey hit a 10-year low in its mid-November reading. It seems like a disconnect.

U of Michigan’s chief economist blamed the drop in confidence on an “escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation.”

In other words, most consumers are fretting over higher prices.

Perhaps we’ll look back late next year and take note of slowing inflation, and the Fed can take a victory lap. The Producer Price Index, which measures wholesale prices, has moderated slightly, per the U.S. BLS. But October’s CPI suggests inflation isn’t slowing anytime soon.