A couple of points that I believe should be emphasized in the discussion about transitory high inflation are that these price increases are likely permanent, and even transitory high inflation can materially affect a person’s standard of living. After the arbitrary time period called “transitory” when we have the arbitrary price increases called “high inflation”, prices will continue to rise at the slower “not high inflation” rate (disinflation) unless we get deflation. Deflation, when measured prices actually go down, is rare and if it doesn’t happen we are stuck with the higher prices.
Oct 2021 CPI was 6.2% over the last 12 months. What if that even declines a bit to 5% but lasts for a few years, then goes back down to not being high (however someone wants to define that), so that “high inflation” does indeed turn out to be transitory? That would still mean about a 15% increase in price levels or put another way, a 15% decrease in the standard of living for the typical urban consumer if their income is flat (CPI after all measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services). It’s as if your income gets cut by 15%, which it does in real terms.
Deflation (a negative CPI) has happened in 13 calendar years since 1913 when the Fed was started but only once in the last 70 years (2009 CPI was -.4% after the GFC). The odds seem pretty good that we’ll have for a while inflation that is higher than the decade of 2011-2020 when it averaged less than 2% per year. Transitory or not, inflation will lower your real income unless earnings increase at the same or greater rate as inflation.
Further, a typical 60/40 portfolio (60% S&P 500/40% Corporate bonds) might not do as well during a period of high and rising inflation. So while very few are predicting hyperinflation, which is also an arbitrary term used to denote very high inflation (if you want to learn how hyperinflation can ravage a society, read Adam Fergusson’s When Money Dies), even transitory “high inflation” can be painful.
A couple of updates on “transitory” high inflation and what it really means for consumers:
(Reuters) – “U.S. Federal Reserve Chair Jerome Powell on Tuesday said the word “transitory” is no longer the most accurate term for describing the nature of the current high inflation rate.”
Doing away with the transitory description seems to be an acknowledgement of the significance of inflation today.
-45% of Americans report financial hardship triggered by increased prices
-10% describe the hardship as threatening their current standard of living
-Seven in 10 lower-income Americans experiencing hardship
“Rising prices are expected to persist, meaning more Americans are likely to report hardship and those most vulnerable are likely to see things get worse before they improve.”
And of course Powell has said “transitory” is no longer accurate.