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Inflation Psychology is Not “Transitory”

June 14, 2021

Inflation is here folks. The latest inflation data show readings of 4.6% on the Consumer Price Index and 6.2% on the Producer Price Index, which are both huge jumps.

Everywhere you read, the Federal Reserve said the inflation is transitory, as in it won’t last long. Depending on your patience level, that will prove to be true. I mean, everything is temporary other than death, right?

But seriously, a lot of the inflation we’re seeing with commodities is due to supply tightness. There were shortages of many items for a variety of reasons. But that will ease over time.

The one thing that is not transitory is the psychology.

For years people came to expect lower prices. If you waited, the price went down. It was true with televisions, phones, computers, and more. That’s kind of the miracle of capitalism. Expecting cheaper prices, people delayed purchases. Everyone’s standard of living rose as a result.

But today is different. The psychology has turned.

People now expect higher prices. Thus, they accelerate purchases. They buy more than they need, and they start to hoard things. And this fear of inflation is what causes inflation.

See, inflation is all about psychology and expectations, which are nearly impossible to reverse in people. When this last happened back in the late 1970s and early 1980s, interest rates were raised to 14% to extinguish inflation expectations. Then a huge recession followed.

Federal Reserve Chair Jerome Powell, known as “the people’s central banker,” has kept rates low. But when you lower rates and print money, causing inflation, it doesn’t exactly help people at the bottom end of the income spectrum. They feel richer because they’re paid more, but prices are rising faster than their wages. So, their standard of living is really going down.

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