Sic transit…

The editors of the Wall Street Journal note that inflation is rising:

The U.S. on Friday reported a rise of 1% in producer prices for March, double the consensus prediction of economists. Prices are up 4.2% in the last year, with goods prices up 7%.

The year-over-year increase is higher in part because of low, pandemic-induced numbers from 2020. The recent acceleration is also related to constraints on the supply of goods, while demand surges as the pandemic eases and consumers spend their pent-up savings and government checks.

For these reasons, Federal Reserve economists say inflation will be “transitory,” receding later this year as supply constraints ease. Let’s hope they’re right.

Everything is transitory. It all depends on the horizon. Maybe inflation will decline “later this year”. How long is “later”? One of the implications is that the passbook savings rate, already extremely low, is now effectively negative.

5 comments… add one
  • bob sykes Link

    Washington is very confused and self-defeating. While the Fed wants 2% inflation, and is pumping money out like mad, the government’s trade and immigration policies are strongly deflationary, driving prices and wages to the world average. The world average wage is about $5/hr. So much for a $15/hr minimum.

    So far it looks like a stand-off between monetary policy and trade/immigration.

    A nice big fat war someplace, not the piddling little wars we have now, would help the economy. Has Biden-is-FDR thought about that?

  • CuriousOnlooker Link

    You know the joke.

    Its disinflation when the prices of stocks, real estate and other assets go up. Its transitory inflation when prices of things I want (an Nvidia Geforce 3090) goes up. Its inflation when prices of things I need (toilet paper) goes up.

    Seriously — Jerome Powell predicted a GDP increase of 7%, and lets be generous with a CPI inflation of 2.5%; that gives a nominal GDP growth of 10% this year. That’s something not achieved since the early 80’s. It may happen — but the structural forces restraining nominal GDP growth for the last 40 years are still there — in anything getting stronger.

    Lacey Hunt makes the case for why inflation is transitory.
    https://hoisington.com/pdf/HIM2021Q1NP.pdf

  • Of his five premises 2-5 are severely flawed.

    Considering #3 only, the disruption cannot be undone. Supply chains will not go “back to normal”. There will be a new normal.

  • CuriousOnlooker Link

    I will appeal to authority that Lacy has put his money where his month is for the last 30 years, investing in long-dated treasuries and outperforming the benchmark bond indexes.

    I’m in the middle position.

    I do think supply chains are forever changed due to geopolitical factors and costs are going to increase.

    But Lacey’s overall thesis, that piling non-productive debt to finance consumption, cannot create sustained inflation (of the demand pull variety) is reasonable.

    The way I reconcile the two points is the transitory inflation will be a stair-step function; a large permanent jump in the price level due to less efficient supply chains, etc. The resulting decrease in demand will ensure the inflation is not self-sustaining.

    I emphasize policy makers don’t comprehend how damaging this “transitory inflation” will be if it comes to pass.

  • Nobody is an expert in everything. Going through his points seriatim:

    1. True but events are dynamic not static.
    2. Note that his examples end 40 years ago. Things are different now.
    3. As you and I have both said.
    4. Not only is technology not advancing geometrically, it’s not advancing linearly.
    5. There will be many fewer start-ups this time and there are many areas that the established players just won’t step into.

    Maybe he’s right but he’s relying on a very slender reed—basically the persistence theory.

Leave a Comment