Just How Transitory Is Inflation?

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Would you buy a five-year CD paying 5%?

I would be shocked if anyone answers “no.”

On a relative basis, versus other fixed-income options, a 5% FDIC-guaranteed CD is a no-brainer. However, to properly evaluate the CD or any investment, we need to factor in inflation expectations. If inflation for the next five years is 10%, the no-brainer CD will be a bust.

The pandemic is easing, and the winds of recovery are roaring at the economy's back. Pent-up demand and the remnants of stimulus are driving robust economic growth. At the same time, the ability to produce and deliver goods remains greatly hampered. The result is inflation, the likes of which have not been seen in over a decade.

Making inflation forecasting even harder is considering how past and future monetary and fiscal stimulus might affect prices.

Assumptions based on prior periods may prove right, but may be a recipe to lose 5% on a 5% CD. Given such a unique environment, we must be suspicious of confident media and Wall Street inflation narratives.

We must think for ourselves. To help you, I break down the 336 components and subcomponents of the CPI to help better appreciate what is driving the inflation rate. In turn, this will prove helpful in thinking about future inflation rates.