Inflation Is Coming But Will It Be Transitory?

In February, the net percentage of firms with current job openings rose 7 points to 40%. This is consistent with the level of job creation in the leisure and hospitality industry in February’s BLS report. The earning trends category was up 5 points to -11%. The net expecting the economy to improve was up 4 points to -19%. Oddly, the worst part of the report was the 3 point decline in expectations for credit conditions. Credit conditions couldn’t be better. This doesn’t make sense.

Inflation Is Coming This Summer

As you can see from the chart below, the NFIB actual price changes index adjusted for gas prices implies core CPI will rise to about 2.9% in the next 6 months. This same chart implies core PCE inflation will rise to about 2.4% this spring. The most interesting aspect of this coming spike in inflation is that policymakers think it will be transitory. That reaction makes the inflation spike more sustainable.

The more ‘establishment’ an economist’s thinking is, the more likely they are to expect inflation to be temporary. There is huge recency bias on inflation because very loose monetary policy hasn’t caused inflation in the past 10 years. The difference this time is fiscal policy is very loose. Plus, the economy is about to reopen which hasn’t happened in decades (hasn’t gone from closed to reopened). The bond market disagrees with most economists. There is no chance the Fed will hike rates this year. There is nothing to stop the coming inflation.

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