All Inflation Is Transitory

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The Federal Reserve has recently started to use the word “transitory” when describing inflation pressures in the U.S. economy. What they’re trying to indicate is that we shouldn’t worry, the pressures we are seeing right now will eventually pass. But that’s stupid. All inflation is transitory.

The word “transitory” is meaningless unless you tell me what you’re transiting from, where you’re transiting to, and how long it will take. When I say that the lunar eclipse is transitory, I can define exactly what I mean: the entirety of the disk will be obscured for x amount of time at this particular terrestrial location. But in inflation, saying it is “transitory” is just a weasel word. The inflation of the 1970s was transitory. It was just a long transit.

From what level do you mean it’s transitory? Inflation has been above zero for seventy years, core inflation for another decade longer than that. Maybe that’s transitory, but we just haven’t finished the transit yet. Presumably, the Fed isn’t saying inflation will go back to zero…maybe they mean it will go back to 2% on core? Or perhaps they mean the average of the last few years, well below that? Unclear. So as usual, the Fed is getting the wrong answers because they’re asking the wrong questions.

Maybe what they mean is that “these price changes we are seeing are all the results of supply and demand imbalances in nominal space, so they’ll all reach equilibrium and inflation will go away.” If that’s so, then (a) they’re probably wrong, (b) that’s what inflation looks like anyway; it doesn’t manifest as smooth price changes across all goods at the same time, and (c) you still haven’t told me over what period it will take for this equilibrium to occur. Suppose it takes 5 years, and the average price change over that time is 5%. Does that mean it was transitory? Absolutely. Does that mean we should ignore it in that case? Absolutely not! A 25% change in the price level over five years would mean significant adjustments in product, service, and asset markets; significant volatility in operations of all sorts of businesses that have made long-term bets on inflation (insurance companies with long-tailed lines, e.g.); and significant changes in expectations and consumer behaviors.

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