Inflation: the Transitory Story

We didn't buy it at $15 a lb. Look at it now.

We have previously voiced our fear that 1970's-style inflation is back. At the ground level we consumers see the evidence all around us: rising prices at the pump, grocery stores, and the real estate listings in our neighborhood.

The Treasury and Federal Reserve still insist that the price spike is transitory, and we cannot unequivocally say they're wrong.

Economists still have some authority with your humble blogger and aren't completely Democratic-Party cheerleaders like the other social sciences. So I'll listen to them though they may take the Administration's side.

On the side of transitory inflation is Prof. Alan Blinder, former Fed Vice Chair:

If you’re worried about a return to the double-digit inflation of the 1970s and ’80s, relax. There is a lot of angst these days as a result of the stunning 5% inflation rate (for the year ending May 2021) in the last consumer-price index release. We haven’t seen a reading that high in 13 years, but the huge supply shocks of the double-digit days aren’t present, and the Federal Reserve won’t let inflation soar. It is certainly possible, however, that inflation will linger above the Fed’s 2% target for a while...

Much of this year’s inflationary surge can be traced to two transitory factors: bounceback from the anomalous negative inflation readings of early 2020 and bottlenecks as the economy reopens unevenly.

...there are three counterarguments [to the high-inflation argument].

First, this worry reflects Phillips curve thinking, which hypothesizes that low unemployment rates make the inflation rate rise. But inflation wasn’t rising before the pandemic despite a 3.5% unemployment rate.

Second, the bond market isn’t buying the argument. Inflation forecasts embedded in bond yields remain consistent with the Fed’s low target.

Third, much of the extreme fiscal stimulus that has been driving spending is transitory. Most pandemic relief spending will be ending soon, and I don’t think Congress will approve much more spending this year that isn’t paid for.

At the heart of the inflation story, like many other important issues of the day, is the battle between our fears (derived from past experience) and hopes (the professionals know what they're doing). Well, once in a while the experts are right.

Meanwhile, as we said in May, it would be wise to hedge your bets:

shift some investments into real estate, gold, art, or more stable foreign currencies that can keep up with dollar inflation. (I would recommend cryptocurrencies, but I don't understand them well enough.) Get out of bonds and low-growth dividend paying stocks. If you have variable-rate loans, convert them to long-term fixed-rate debt.

Good luck.