How Transitory Is Transitory?

What exactly is “transitory?” You and your wife may disagree on its meaning when your old friend asks if he can stay with you while he “Sorts things out.” The term is virtually worthless without some guiding context, as in “Honey, he’ll be out of here by Monday. Tuesday the latest.”

Last week, Federal Reserve Chairman Jerome Powell was asked to provide much needed clarity as to how this term applies to our current bout of much higher than forecast inflation. Given that much of the economic outlook rests on how quickly the surge subsides, his definition is hardly semantic. Based on his years of experience, and the mountains of data the Fed has collected, the Chairman offered this direct response when asked about the practical meaning of transitory: “It depends.” That’s about as much detail as he was prepared to offer.

Although Chair Powell has only had his job for a few years, he may be well advised to familiarize himself with the Fed’s checkered history with the term “transitory.” Back in 2006 and 2007, Powell’s predecessor’s asserted countless times that the troubles then arising in the mortgage market were “transitory.” As it turns out they were horribly wrong. More recently, the Fed has been similarly wrong in their predictions about inflation.

For much of the last decade monthly CPI increases consistently ranged from .1% on the low end to .3% on the high end. This January, the number was .3%, an increase from .2% in December of 2020. Nothing terribly alarming there. But in February the number was .4%, in March, .6% and April, .8%. In other words, month over month CPI increased five months in a row. That is a rare and alarming trend. More importantly, each month’s results exceeded the Fed’s forecasts. Many took confidence however in May, when the number came in at “only” .6%. While this result also blew out the forecasts at least it represented a dip from the .8% in April. But in June, we got a huge .9%, a number that exceeded the average forecast by 50%, and was the biggest monthly increase since the summer of 2008.

Adding up the numbers gives us a 3.6% increase in the CPI in just 6 months, an annual pace of 7.2%. But the trend shouldn’t be ignored. The bigger increases have been more recent. If we average the inflation rate for the second quarter for the remainder of the year, full year inflation will be well above 8%. The last time that inflation trended like this was in the Summer of 2008, when a falling dollar and soaring commodity and import prices pulled inflation up dramatically. But that crisis was averted, ironically, by the Financial Crash of 2008. The economic free fall in the last months of that year crushed demand and turned off the inflationary heat. The ensuing “safe haven” dollar rally, which took the dollar up from an all-time record low, also helped keep prices in check. But this time around, no such relief is in sight. In fact, opposite forces are gathering.