The Meaning Of Transitory

The finance and economics commentariat have been busy in the past few months educating each other about what inflation is and what it isn’t. To re-cap, just because prices are going up doesn’t mean that inflation is. Inflation, after all, is the rate at which prices are advancing, not the fact that prices are rising themselves.

More specifically, just because prices go up a lot in period 1, inflation can’t really be said to be accelerating unless the rate at which prices go up is higher in period 2, 3, and so on. To complete the circle; if prices were falling, we’d call it deflation, and the same argument on the rate of decline would apply with an inverse sign.

The amount of time spent by economists pointing out this trivial point is mostly an attempt to assure each other, and policymakers, that the spectacular CPI and PPI headlines we presently see on the screens are nothing to worry about. It follows that slowing the pace of asset purchases, not to mention raising interest rates, would be a grave and unforgivable error.

The path of virtue and righteousness is paved with freshly fiat currency created by a non-budget constrained sovereign, or something. I know that I sound cynical with this line. But I persist that it is impossible to adequately analyze the interplay between markets, the economy, and policy at this point without factoring-in the lens through which the mainstream looks at the world.

Meanwhile on inflation, the bond market has long since voted down the reflation trade, offering up strong support for those arguing that rocketing inflation is both transitory and, in any case, driven by a one-off surge in prices in a few components. Used car prices in the US is the example most cited, but there are other candidates, chiefly of which are energy prices and prices in supposedly COVID-19-sensitive sectors.

This implies, again, that the number we see on the screens conveys a false view of the world. As a Eurozone economist—whose job it is to read the entrails of the EZ HICP data—I agree with the idea that not all is what it seems in the headline numbers.

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