Inflation – Temporary Or Not?

This is a major topic throughout the world. Is high inflation here to stay or is it transitory as we come out of the pandemic? And, what length of time defines “transitory?”

The rapid bounce back in the economy as we left the house to be out and about stressed different parts of the economy that takes time to re-activate. We just hop in the car and drive somewhere or make airline reservations. But the supply chain doesn’t work that way.

According to Greg Ip of the Wall Street Journal, “this inflation is made possible by strong demand and restricted supply.”

The Council of Economic Advisors believes the closest similarity is post World War II. The shortages caused by war couldn’t meet the pent-up demand when the war ended.

By October 2022, JP Morgan anticipates inflation to be running in the 2.3% range, down from the current 6% range.

There are others who believe inflation is not transitory and the Fed needs to raise interest rates and stop buying bonds within the next six months (aka quantitative easing).

From their perspective, the reasons inflation is not transitory include:

• Excessive government, corporate, and consumer debt
• Deficit fiscal spending along with fiscal and monetary stimulus
• Deglobalization (bringing manufacturing back to the U.S.) – higher labor and costs
• Energy prices may continue to rise as supply remains constrained but the need rises (infrastructure activity will increase demand).
• Increasing wages will continue.
• Dollar decline – propped up by Fed purchase. Once it stops or is reduced, the dollar may decline, increasing the price of imports.

Going back to the opening of this article, how do you define transitory? We have already had six months of inflation and many see it going into at least the first half of 2022. The easy money from the Fed and companies raising prices fuels the stock market. If the easy money spigot becomes a trickle and consumers are no longer willing to pay higher prices, we would anticipate a declining stock market as adjustments are made within the economy.

What about Europe? According to “As Inflation Soars, Central Banks Scramble to Lift Rates,” February 3, 2022, in the Wall Street Journal, Europe is also experiencing higher inflation and do not believe it will take time to come down. Bank of England already increased their interest rates.