Everything is Transitory

By Charlie Bilello

14 May 2021


Core inflation in the US has moved up to 3%, its highest level in 25 years (note: core inflation excludes food/energy).

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At 4.2%, overall inflation is running at its highest level since 2008.

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The prices of imports and exports are surging…

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The price of Copper, one of the most important industrial metals, is now at an all-time high…

…while the Price of Lumber (a major component of new homes) has gone vertical, up more than 4x in the last year…

Meanwhile, gas prices are above $3 a gallon, at their highest levels since 2014.

At their next meeting, the Federal Reserve will, with a single word, dismiss all concerns related to rising prices: “transitory.”

What do they mean?

Simply: the current rate of inflation is not permanent.

And of course that is true, as nothing in this world is permanent.

War. Famine. Pestilence. They all have a beginning and an end.

But does that make them insignificant?

Hardly, just as higher inflation, even if temporary, is not an irrelevant fact.

Take the extreme example: Venezuela. They have a current inflation rate of over 3,000%, the highest in the world. One could say this is “transitory” as it will not go on forever, but it is still devastating to the 28 million people that live there. And if inflation were to go down to 1% tomorrow it wouldn’t erase the damage that was done.

Why should anything be done about something that is only transitory? Good question, and one might ask the Fed just that given their contradictory logic where…

-a transitory move down in inflation is acted upon immediately with easy money and emergency policy measures (0% rates/QE in March 2020) while…

-a transitory move up in inflation is completely ignored with continued easing and emergency policy measures (0% rates/QE Today and for years to come).

Why the contradiction? Because the prevailing view today is that there are absolutely no downsides to endless easing and deficit spending. And if there are no downsides, you only do more of it.

Even if it means higher inflation? Yes, even that. The Fed today is not only unfazed by higher inflation but seems to be welcoming it.

We haven’t seen that stance in a long, long time as the Fed (starting with Volcker) has always sought to retain its image as the inflation fighter.

But that was the past. It’s been so long since Americans have experienced the harmful effects of inflation that they’ve either forgotten it or weren’t alive to experience it. Which means the Fed has a green light to do as they see fit, monetizing the explosion in debt and throwing fuel on the inflationary fire with promises of 0% rates for years to come.

Related Posts:

Stocks, Bonds, and Higher Inflation

The Definition of Inflation


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About the author

Charlie Bilello

Charlie is the founder and CEO of Compound Capital Advisors.

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