August 9, 2021

The government keeps telling us the inflation is “transitory,” or temporary. But is it?

The Commerce Department reported the consumer price index (CPI) jumped to an annualized rate of 5.4% in June, the highest level since August 2008. Core CPI, which doesn’t include food and energy, rose at an annual rate of 4.5% last month, the highest reading in 30 years.

The Federal Reserve has been assuring us this is all temporary. Its leaders say prices should subside later this year or in 2022, and that this jump in inflation is temporary, fueled by a few big-ticket items with sharply rising prices in recent months.

Yet, higher than expected inflation readings come out month after month. Consumers are increasingly coming to question whether this is just temporary.

Inflation has been escalating due to several factors, including supply chain bottlenecks, extraordinarily high demand, and year-over-year comparisons to a time when the economy was struggling to reopen. Also consider how prices for used cars and trucks leapt 10.5% from the previous month. That accounted for a third of the overall CPI rise. The prices for airline fares, rental cars, hotels, entertainment, recreation, apparel, and more also rose sharply.

While the Fed bangs the “transitory” drum, others believe inflation is destined to go even higher this year – perhaps up to 10% or more before the cycle is over. This crowds points to how the Fed has pumped an unprecedented $8 trillion of stimulus into the economy and says that money will result in continued higher consumer prices.

In the end, we have two widely different views on where the economy and the markets are going in the next few years. Reality will probably land somewhere in the middle.