Friday, July 14, 2000, was a bad day to be in Treasuries. The 10-year UST yield spiked 9 bps after the Census Bureau reported June 2000 retail sales growth had been nearly 10% year-over-year. That plus a similarly pleasant reading from the Federal Reserve for Industrial Production left bond traders rethinking their trades, a sudden burst of inflationary confidence which spilled over into the following Monday, July 17.

For just the two days combined, 10-year yields had added a sharp and painful 16 bps.

Before then, however, rates had been falling not rising. LT yields had peaked all the way back at the start of the year. Directly contradicting Alan Greenspan’s Fed, the latter had been increasingly concerned about consumer prices becoming a sustained threat from what was judged to be an economy ready to overheat (the “maestro”, as he was known at the time, didn’t pay much attention to the NASDAQ).

The bond market disagreed with bids on safe instruments pushing up their prices even as Fed models and official positions hardened on the inflation side with June retail sales and IP temporarily backing them. In early May 2000, the FOMC had voted for a double rate hike to stay ahead of this possible inflationary monster, a whopper of 50 bps that followed already a series of five 25 bps increases in the federal funds target (monetary policy) begun the prior June.

By that November, the FOMC got together in light of weakening demand more consistent with what the bond market had been trying to warn, yet members remained convinced anyway of the greater threats from rising inflation rather than rising recession risks. Judging it nothing more than a slowdown in growth, something like 1998 and early 1999, the committee heard mostly about non-transitory price risks.

In his November 15, 2000, presentation reviewing data, interpretations, and modeled projections, staff economist Dave Stockton agreed that overheating not recession should be policymakers’ primary focus:

MR. STOCKTON. Moreover, in the present circumstances, the upside risks to inflation that would accompany a reacceleration of activity are probably greater than a couple of years ago. Most broad measures of inflation–headline and core–bottomed out in 1998 or 1999 and have moved up since then. While the uncertainties remain very large, we have seen little in the recent wage and price data to contradict our view that the economy is operating beyond its potential. [emphasis added]

Indeed, measures of consumer prices such as the BLS’s CPI only bolstered officials’ confidence. While long-term yields continued to fall, the yield curve inverting throughout the summer, consumer prices had instead kept appreciating at high rate. Not just bonds vs. Economists, bonds vs. Economists with a CPI in their pocket. 

The headline CPI had registered nearly 4% year-over-year for the month of June 2000 (the estimate released less than two weeks after the retail sales and IP reports noted above). The rate only moderated about 30 bps in the following months as oil prices joined bond rates on the downside.

Core CPI metrics stayed hot, though, and a key one seemed to go nuclear all within this timeframe. First, the CPI less Food & Energy had gotten up to 2.60% by August 2000 and stuck there. The CPI Services less Rent basket jumped to 4% around the same month, and then again to nearly 6% in the two months after the November FOMC discussion.

“Operating beyond its potential”, these overheating fears, quickly dissipated as did consumer price acceleration once the outright recession, the dot-com recession, began in a matter of just a few months later – exactly as the bond market had forecast with falling rates and inverting curves. And some say there is no predictive value in them when it comes to inflation.

Thus, the year 2000’s “inflation” was no inflation at all – it was a transitory burst of consumer price gains that didn’t meet the threshold. And while many see this definition as arbitrary, it is – and I hate being forced to defend Economics – entirely appropriate. There is a world of difference between short-run spurts in consumer prices and a sustained rise and acceleration across a broad cross-section.

This kind of transitory “inflation” event isn’t actually uncommon. On the contrary, it would repeat almost exactly the same starting late in 2007 and lasting all the way until Lehman Brothers/AIG in 2008.

Though there had been any number of contrary indications, huge red flags all over the place, officials at Ben Bernanke’s Fed were just as concerned about inflation as they had been about TAF auctions and overseas dollar swaps. In fact, thinking their policies potentially too potent, Fed models and staff economists prepared one scenario after another which suggested at worst a mild downturn in 2008 followed by what they judged the real danger of “overheating” by early 2009.

Like 2000, this view seemingly supported once again by the BLS and the behavior of consumer prices; these, boosted tremendously by commodities, accelerated particularly following huge doses of “stimulus” early in 2008 including the Bush administration’s pioneering US use of the “helicopter” we nowadays find familiar.

By July and August 2008 – with the Great “Recession” already halfway by then – the same services CPI less rent would spike above 6% after accelerating wildly since before Bear Stearns (seemingly after the first TAF auctions and dollar swaps). This led quite a few to worry so much “money printing” would end up being the bigger problem.

Instead, everywhere the opposite in everything else outside the CPI and commodities. In terms of consumer prices, like 2000 and 2001, growing macro slack ended all threats of transitory factors becoming actual sustained inflation. It seemed surreal then, and still does now, how even core CPI rates could so excitedly surge during what had been the entire first half of the worst recession since the thirties (to that point).

Consumer prices can and do accelerate to what may otherwise seem otherworldly levels, but what keeps them that way hasn’t been around since the seventies. Thus, always transitory.

Except, maybe today. The BLS CPI report for the month of April 2021 puts all these things back in play. With estimates so huge, this has to be different, right?

The headline rate was up 4.16% year-over-year, higher than anticipated and the highest since…September 2008. Ah, but the core CPI, the one which strips out food and energy, that one went vertical, leaping 2.96% which was the most since…1996. While eighty or so basis points of that gain are attributable to base effects, comparing prices in April 2021 with the bottom-feeding COVID prices of April 2020, the month-over-month change (seasonally adjusted) was an astounding 0.92%.

The highest since…the last days of the Great Inflation.

How can any sane, rational person think this is just transitory?

Easy, it’s all transitory given that these things can and do happen. Acceleration of consumer prices during periods of high macro slack and weak demand aren’t game-changers. In fact, they are most often indicative of outside factors – like helicopters – rather than the underlying facts of the real economy.

The monthly gain in the core CPI last month was absolutely impressive, eye-opening, but we just did this a few months ago and for all the same reasons! Back in July 2020, after Reopening 1 had reached its frenzied apex bursting at the seams with Uncle Sam’s helicopter deliveries and unemployment bonuses, the monthly increase in the core was 0.54% which had been the highest in just short of three decades. Most impressive (sounding).

And it wasn’t just July – June, July, and August 2020 – when consumer prices went on a historic run. The reason we don’t remember or hear much about that run this year is how after the sugar rush wore off, by late summer, the frenzied elevation proved to have been, say it with me, transitory.

In fact, by the end of last year, consumer price rates were noticeably decelerating all over again. Thus, not inflation. Government on; consumer prices up for a few months. Government off; back to disinflationary normal.

This one’s bigger than July, but it’s all the same factors including more helicopters, another round of reopening, plus a greater supply-side squeeze pressing commodities toward outer space.

None of those things are inflation; painful in the short run, yes, and that’s really the problem with the inflation story overall and why it can never get that far. These price changes only add to the constraints, to the misery as noted yesterday. They’ve shown up at the worst possible time, very much like late 2000 and the first half of 2008, to make high levels of existing macro slack that much more unmanageable and potential recovery from it that much less robust.

What’s being said is, like this year’s small rise in long-term rates, that this is something entirely new, representing a categorical change. It’s not anything new, but it becomes an emotional argument based on other issues (either a partisan political football to bash whichever party; or, “money printing” and reckless-to-insane government spending just have to produce inflation because people who correctly hate money printing and government spending need them to in order to prove their case to the apathetic public once and for all).

Jay Powell’s Fed, contrary to Greenspan’s in ’00 and Bernanke’s in ’08, isn’t committed to the same mistakes. While it may be tempting to see this as a contrarian sign for the inflation case – if the Fed was always wrong to expect inflation that was never coming, then might it not this time be wrong about inflation it says won’t? – reviewing these historical episodes shows maybe just by accident official analysis on more solid ground (if only because they can blame COVID).

The FOMC isn’t influencing bond yields, meaning the bond market potentially making an inflationary mistake by listening to officials; it’s the other way around. For once, the official case recognizes the same (slack and intermediate- and long-run downside uncertainty) which is animating the bond market even today as it sells off again. Bad days for bonds happen, too. 

The whole thing boils down to slack (and what causes it, which we don’t need to get into here). The economy right now is improving, even rebounding as more reopening gets done, but with such a long way still to go and having squandered so much time just to get this far once the latest sugar high wears off, what will the CPI look like this summer?

Maybe too much like last summer.

Transitory inflation is not inflation.