Transitory Inflation Turning Into an Inflationary Spiral

Consumer prices have been rising precipitously this year. If you annualize the Consumer Price Index through the first five months of 2021, you get a CPI increase of over 6%. Federal Reserve Chairman Jerome Powell continues to push the narrative that inflation is transitory, but not everybody buys into this storyline. On the Wolf Street Report, Financial Analyst Wolf Richter said Powell’s temporary inflation is turning into an “inflation spiral.”
Richter said some measure of inflation will likely tick down in the months ahead, but to steal Powell’s term, the relief will be transitory and only serve to offer false hope before inflation starts rising again.

The first bout of inflation always looks temporary. But during those first bouts of inflation, that’s when the triggers of persistent inflation, namely the inflationary mindset and inflation expectations are being unleashed.”

The markets seem increasingly skeptical of Powell’s insistence that inflation is transitory. Last week, the IMF warned of a “sustained” inflation rise in the United States. Many people are starting to talk about the Fed tightening monetary policy sooner rather than later to fight rising prices and worry this could cause a slowdown in the economic recovery. But Peter Schiff says the markets are bracing for the wrong impact. The Fed won’t fight inflation because it can’t. There is no way to tighten monetary policy without collapsing the economy.

It’s not that inflation is going to turn out to be not transitory and therefore the Fed is going to fight it,” Schiff said. “It’s that inflation is not transitory and the Fed is not going to fight it. And because the Fed is not going to fight the non-transitory inflation, it’s actually going to end up getting much worse than people think.”

Regardless of what the Fed may or may not do in the future, the fiscal and monetary stimuli are still ongoing today. As Richter put it, “the government and the Fed still have their foot fully on the accelerator.”

Meanwhile, prices continue to rise throughout the economy, for all kinds of reasons. There are certainly supply chain issues as demand returns in the wake of the pandemic. There have been price increases due to shortages. Some commodity prices have spiked And of course, we also have artificial demand created by central bank and government stimulus. Richter said the bottom line is that prices are rising, and at this point, nobody is resisting the price increases.

So much cash has been created and handed out that price doesn’t even matter anymore. People are paying whatever, even for discretionary purchases that they don’t have to buy.”

As a result, we have price spikes cascading from product to product and service to service.

This surge of inflation is becoming engrained in the inflation expectations of company decision-makers and consumers alike. They’re adjusting to it and in this manner inflation becomes persistent.”

In a nutshell, the overall inflationary environment isn’t transitory, although some of the factors that unleashed the inflationary cascade might be transitory.

Richter says we’re looking at a generational change. People who became adults in the 1990s or later have never experienced this kind of inflation.

Even if the economy doesn’t move into hyperinflation, persistent rising prices will be extremely disruptive to the economy – whether the Fed reacts quickly or slowly.

This persistent inflation is what is being triggered right now by the fiscal and monetary stimulus and by the temporary inflation spikes. And the Fed, by putting that issue officially on ignore is making it far worse.”