Is Inflation "Transitory"? Here's Your Simple Test

The Federal Reserve has been bleating that inflation is "transitory"--but what about the real world that we live in, as opposed to the abstract funhouse of rigged statistics? Here's a simple test to help you decide if inflation is "transitory" in the real world.

Let's start with some simple stipulations: price is price, there are no tricks like hedonics or substitution. Nobody cares if the truck stereo is better than it was 40 years ago, the price of the truck is the price we pay today, and that's all that matters.

(Funny, the funhouse statistical adjustments never consider that appliances that used to last 30 years now break down and are junked after 3 years--if we adjusted for that, the $500 washer would be tagged at $5,000 today because it has lost 90% of its durability over the past 30 years.)

Second, inflation must be weighted to "big ticket" non-discretionary items. The funhouse statistical trickery counts a $10 drop in the price of a TV (which you buy every few years at best) as equal to a $100 rise in childcare, which you pay monthly. No, no, no: a 10% rise in rent, healthcare insurance, and childcare is $400 a month or roughly $5,000 a year. A 10% decline in a TV you buy every three years is $50. Even a 50% drop in the price of a TV ($250) is $83 per year--absolutely trivial, absolutely meaningless compared to $5,000 in higher big-ticket expenses.

You can forego the new TV but not the rent, childcare or healthcare. That's the difference between "big ticket" nondiscretionary and discretionary (meals out, 3rd TV, etc.).

Third, we jettison the painfully obvious manipulation of "owners equivalent rent" for housing costs. Housing costs are the prices we pay for rent, owning a home and paying property taxes, insurance, and maintenance costs to own the home. (Have you priced having a new roof put on your house by a licensed, reputable contractor? No? Well, it's become a lot more expensive than it was a few years ago. Where is that enormous price leap in "owners equivalent rent"? Just how stupid does the Fed reckon we are?)

OK, here's the test: let's say markets finally take a deflationary dive from overvalued heights. Housing, stocks and other risk assets fall 30%. Trillions of dollars in "wealth" (that didn't exist prior to the Everything Bubble inflating) has vanished, generating a reverse wealth effect as all the owners of these assets feel poorer and less inclined to borrow and spend. This is classically considered highly deflationary: demand drops, prices drop.

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Disclosures: None.

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