Team 'transitory' shouldn't breathe a sigh of relief over inflation just yet

·Editor focused on markets and the economy

Wed, Sep 15, 2021, 2:07 AM3 min read

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Wednesday, September 15, 2021

'The most inflationary' 50 years ever shows no signs of slowing

First, the good news: August’s price pressures as measured by the consumer price index (CPI) were mostly in-line with market expectations. Formerly stratospheric pricing associated with categories like used cars (-1.5%) and air travel (-9.1%) came back to earth, which helped to tame inflation.

Now the bad news: It’s becoming increasingly apparent that those “transitory” costs won't be enough to normalize prices to pre-pandemic levels, and will likely continue what one economist recently called a half-century trend of soaring prices.

There are at least a few reasons behind this, but two in particular stick out: Businesses and service providers have grown more comfortable charging customers (a function of still elevated demand), and housing prices are still climbing in the face of COVID-era challenges.

August's CPI index breakdown by category. (JPMorgan, Bureau of Labor Statistics)

With respect to businesses, ING chief international economist James Knightley pointed to National Federation of Independent Business (NFIB) data that nearly half of small businesses are hiking prices, while a net 44% of them expect to continue doing so in the near-term.

The NFIB survey results dovetailed with New York Federal Reserve data released earlier this week that showed consumer inflation expectations for the next 1-3 years are elevated.

“Remember...the key quote from last week's Federal Reserve Beige Book…’Some Districts reported that businesses are finding it easier to pass along more cost increases through higher prices. Several Districts indicated that businesses anticipate significant hikes in their selling prices in the months ahead,’” Knightley wrote in a research note on Tuesday.

“None of this suggests we should be expecting a meaningful moderation in price pressures anytime soon,” he added.

In fact, the NY Fed data — which hit a series high — captured consumer anxiety about higher costs associated with food (a crucial point that the Morning Brief plans to explore soon), medical care, and rent.

That last category cannot be understated, with homeowners and renters alike feeling priced out of a frothy market that displays all the characteristics of a bubble — but according to many economists, isn’t actually one.

The bitter irony is that spiking rental costs are likely to be amplified by the end of the federal eviction moratorium, which may displace millions of poor renters — leaving cash-strapped landlords (many of whom have gone more than a year without being paid, as Yahoo Finance’s Dani Romero has covered extensively in recent weeks) free to bid up prices on suddenly vacant apartments.

The inflation outlook makes some think that the Fed’s hopes of transitory inflation are based on an increasingly thin reed.

And if Deutsche Bank’s Jim Reid is right, the coming years are likely to resemble the last 50 — which the economist called “the most inflationary global half-century in human history” where no economy has seen inflation average below 2% for a sustained period of time.

"Although the last decade has seen relatively low inflation for the most part, fiat money is highly inflationary in aggregate through history," according to Reid, for reasons he associated the end of the gold standard, which unshackled government deficit spending worldwide.

"You can have periods of low inflation but you've never been able to offset the pockets of high inflation associated with fiat regimes," he added.

By Javier E. David, editor at Yahoo Finance. Follow him at @Teflongeek