At Knowledge Leaders Capital Stephen Vannelli delves into a point I’ve considered around here—what the heck does “transitory” mean?
- Recent economic data in the US and around the world has surprised on the downside for the last several months, while inflation continues to surprise on the high side.
- We are told that inflation is transitory, but does that mean that stock price and house price inflation is transitory too?
- Is the era of digital deflation over as semiconductor prices are now increasing in price rather than falling?
all these and more are explored in an attached PDF. Here’s a telling graphic:
I don’t think that tells the story we’ve been hearing.
Here are some observations from the analysis which addresses the question: that product outputs seem constrained and increasing shipping costs both suggest that supply chain issues are not transitory.
I do the food shopping in our house, and my impression is that inflation is pretty strong, especially for meat. The State Teachers Retirement Found of Ohio eliminated cost of living adjustments a few years ago (for five years), so long term inflation is a consideration. Fortunately, we have no debt other than a small home improvement long at a fixed rate. I remember the runaway inflation of the Carter/Reagan era, with its 21% apr variable rate home loans. I hope all those people with ca. 3% loans have fixed rate loans.
In regards to production and distribution, we still have rolling shortages in our local Kroger. The worst category right now is cat food, but paper products are in good supply, although the brands are limited. In fact, that seems to be the most common shortage; some brands have disappeared, especially in pasta.
Local gun stores have very little ammunition. Walmart has virtually none, not even shotgun shells. Deer season is approaching, and Ohio is a shotgun state. What ammo is available is very expensive, $1 per rd for 9 mm target and other pistol and rifle rounds. Hollow points have not been available anywhere for months. I saw .308 at Rural King for the first time in weeks; over $1 per rd for some no name off brand.
Shortages have been in place for over a year, and no end is in sight. If there is another panic attack this fall, what happens then? We have slowly built up stockpiles of necessities, and could probably last three to six months on staples without new purchases. We’ve always kept one to two months of staples in our root cellar, but that no longer seems wise.
I wonder how much of the shortages are due to simple stockpiling in homes–hoarding if you will. My single daughter does it, as do my sisters and their families.
The killer in our case would be electricity. We live in the country and have a generator, but there is only a week’s supply of propane on site, and that will decline as the nights get colder, and our propane furnace kicks in. A few years ago we had propane rationing in Ohio. That was scary. We are retired and do very little driving, less than 5,000 miles per year. Gasoline rationing would be a nuisance, but not a killer. I try to keep the tanks at least half full.
I wish I had confidence in the people running this country, but I don’t. Just about anything is possible with the gang now in Washington and in our state and local governments. Republicans are no better than Democrats, and should they win Congress in 2022, they will do no better than the Dims. The evil party vs. the stupid party, indeed.
Shortages:
I’ve noticed signs that limit smelled fishing hooks to one package per all summer.
As to your generator, hopefully it helps.
I’ve been tracking an equity, GNRC, which follows outages with sales calls , sells and installs backup generators.
Problem is, that’s dependent on natural gas or propane supplies.
California has actually threatened to outlaw natural gas on climate concerns.
Like Elon Musk they are making forays into solar shingles and battery backups.
It’s just hard to see right now how home energy will be supplied in ten years but it will be supplied in some way.
I’ve been following the chip shortage in part because my son wants to build his own PC – but parts are in short supply and priced very high, especially graphics cards. But the chip shortage is affecting everything that needs chips. I work in the mobile internet (primarily cellular) industry now and it’s the same problem – can’t get supply and everything costs more.
TSMC which, I was surprised to learn, controls 50% of the chip market, recently said that the shortage may not be alleviated until 2023. They are building new plants, but that takes time.
https://www.statista.com/statistics/867223/worldwide-semiconductor-foundries-by-market-share/
Like automobiles.
I’ve written about the issue you touched on before. In both Taiwan and mainland China production tends to be VERY vertical.
Transitory is any economic phenomenon that politicians know will be viewed dimly by the voting public.
“Good economic news†is a blip that occurred for two days……last week.
The definition of “transitory inflation” depends on who you are asking?
To the common man on the street, it is a temporary change in the price level. Like gas moving from $2 to $3 due to Hurricane Ida disrupting refineries but moving to $2 when the refineries are repaired.
To the more knowledgeable crowd, including most economists, transitory inflation is a temporary change in the rate of change in the price level. i.e. it is assumed that the price level should increase by 2% a year, and transitory inflation is if it goes to 4% for a year then goes back to 2% a year.
More surprisingly, there’s a 3rd definition that has a following at the Fed. Transitory inflation is a temporary change in the in rate of change of the rate of change in the price level (not a typo, the 2nd derivative). How else to interpret that the Fed has raised its inflation target from a maximum of 2% to an average of 2% over an economic cycle to suggestions of a further raise of its inflation target. (https://www.wsj.com/articles/how-to-deal-with-above-target-inflation-raise-the-target-11630504980)
The implication is a sizable fraction of the Fed believes its “transitory inflation” as long as inflation (defined as the rate of change of price level) is not continuously accelerating.
I agree with that assessment and, indeed, I’ve called out the increase-first derivative-second derivative point several times over the years. IMO the second derivative approach to inflation is lunacy and a violation of the Fed’s mission statement.
The Federal Reserve’s empowering legislation is actually pretty clear. It’s not talking about rate of change or change in the rate of change. It’s about price stability. You can argue whether that is the right objective or not but that is the objective.
What are the bond markets saying, or do we not believe in markets anymore? (Just to stake out a position I think that most of the people who claim to believe in markets really only believe in them when they say what they want to believe anyway.)
Steve
The bond market is saying ??. Historically, there isn’t a direct relationship between government bonds and inflation.
Look up the 1940’s — government bonds were in the 2% range, yet inflation got to 10+% multiple times.