Summary

The article discusses the misjudgment by the Federal Reserve regarding inflation being transitory, the actual inflation rates as indicated by CPI and PPI, the Fed's changing stance on inflation, and potential actions to combat it, as well as personal strategies to mitigate the effects of inflation.

Abstract

The article titled "Inflation is Not Transitory" provides an analysis of the Federal Reserve's initial description of inflation as "transitory" and the subsequent realization that inflation rates are more persistent and significant than anticipated. It highlights the increase in corporate mentions of inflation, the substantial rise in both the Consumer Price Index (CPI) and the Producer Price Index (PPI) since April 2021, and the Fed's shift in language and policy to address the high inflation rates. The article also points out the potential policy mistakes made by the Fed due to the initial transitory inflation call and suggests that the Fed will likely take aggressive action to curb inflation, including accelerating the tapering of bond purchases and raising interest rates. Furthermore, it advises individuals on how to protect their purchasing power against inflation by investing in assets such as stocks, real estate, gold, and bitcoin, and by advocating for salary adjustments that reflect the true rate of inflation.

Opinions

The Federal Reserve, particularly Chairman Jerome Powell, has been criticized for underestimating the persistence of inflation by initially labeling it as "transitory."
Economists and investors, including Mohamed El-Erian, have expressed skepticism about the Fed's inflation assessment, considering it a significant misstep.
Treasury Secretary Janet Yellen has acknowledged the need to move away from the term "transitory" to describe inflation, indicating a recognition of its lasting impact.
The article suggests that the Fed's easy money policies during the pandemic have contributed to the current high inflation rates.
There is an expectation that the Fed will announce a more aggressive approach to tightening monetary policy in order to control inflation.
The author recommends that individuals consider holding assets that can appreciate with inflation, such as stocks and real estate, and also consider alternative investments like gold and bitcoin as hedges against inflation.
The article implies that employees should negotiate salary increases that keep pace with the actual inflation rates to maintain their purchasing power.

Inflation is Not Transitory

How wrong the Fed really was and what to expect

Way back in late April, Bank of America put out an eye-opening stat.

The mention of the word “inflation” on corporate earnings calls has more than tripled so far this quarter.

This was likely related to Q1 earning calls. I’d bet the mention of “inflation” is at all-time highs for this current quarter. Around this time, many large companies — Coca-Cola, PepsiCo, General Mills, Proctor and Gamble, etc. — were letting customers know that price increases were around the corner.

This was around the time the Federal Reserve and Chairman Jerome Powell started using the word “transitory” to describe the current inflation situation.

The first use of transitory I could find was also back in late April. Let’s see how bad inflation has been since then.

CPI and PPI Numbers

Two figures to look at when analyzing inflation are the consumer price index (CPI) and the producer price index (PPI).

CPI measures the change in prices over time that consumers pay for goods and services. While PPI measures costs from the viewpoint of industries that make the products.

Both indexes have been up substantially since April 2021.

Below is the month-over-month increase for CPI.

Below is the month-over-month increase for PPI.

It’s evident that the monthly increases for these indexes have been steady — and far above the Fed’s desired goal of around 2% annually.

The True Inflation Number is Frightening

It’s more than the 2% we’re led to believe

medium.com

On an annualized basis, inflation (CPI) is up 6.8% since November 2021. PPI is up 9.6% from a year ago.

No one, consumers or businesses, wants to be paying that much more than they did one year ago.

What the Federal Reserve is now Saying

Fear not, the Fed is now trying to retire the word “transitory.” At least now we know we’ll be screwed for a while.

At the end of November, both Powell and Treasury Secretary Janet Yellen admitted high inflation might be here to stay.

Speaking during a congressional hearing, Powell admitted,

“I think it’s probably a good time to retire [tranistory] and try to explain more clearly what we mean.”

Yellen, in an interview with Reuters, stated, “I am ready to retire the word transitory,” later adding transitory inflation is no longer what we are dealing with.

Even before Powell and Yellen moved to retire calling inflation transitory, many economists and investors were skeptical inflation would not be long term. One recent critic, Allianz’s Chief Economic Advisor Mohamed El-Erian, went even further.

The characterization of inflation as transitory is probably the worst inflation call in the history of the Federal Reserve, and it results in a high probability of a policy mistake.

What To Expect the Federal Reserve To Do

Later today, (12/15), Powell will speak after the Federal Reserve ends its two-day meeting.

It is widely expected that the Fed will drastically change its policies. Markets will likely be in waiting mode today, waiting to hear what Powell has to say.

At the onset of the pandemic, the Fed lowered interest rates to near zero and began buying bonds. After almost two years of these easy money policies, we now have high inflation. The Federal Reserve will look to use its “tools” to slow down inflation.

This means a faster end to a tapering of their $120 billion per month bond purchases. And also raising interest rates. Some analysts are now going as bold as to say six rate hikes by the end of 2023.

What You Can Do About Inflation

No one likes losing purchasing power. But that is what high inflation does to your money.

The inflation picture will be a little clearer after Powell speaks this afternoon.

One way to protect yourself is to hold assets that benefit from inflation. Stocks and real estate are generally considered assets that can be propped up in value due to inflation.

There are also assets such as gold, or bitcoin, that are considered inflation hedges.

And lastly, if your company gives you the normal 2–3% annual raise, show them the annualized inflation figures. Because you're now paying almost 7% more for items, your salary should reflect such changes.