The Meaning Of Transitory

Summary

• Just because prices are going up doesn’t mean that inflation is. Inflation, after all, is the rate at which prices are advancing, not the fact that prices are rising in themselves.
• It makes no sense to claim that transitory includes all versions of the world in which inflation does not stay at, or make, new cyclical highs on a sequential basis.
• In this sense, recent curve flattening and sustained rise in short-term rate expectations could also be bond markets discounting a world in which inflation stays high enough to prompt policymakers to withdraw policy stimulus quickly enough to dent growth and tighten financial conditions.

The finance and economics commentariat has been busy in the past few months educating each other about what inflation is and what isn’t. To recap, just because prices are going up doesn’t mean that inflation is. Inflation, after all, is the rate at which prices are advancing, not the fact that prices are rising in themselves. More specifically, just because prices go up a lot in period 1, inflation can’t really be said to be accelerating, unless the rate at which prices go up is higher in period 2, 3 and so on. To complete the circle; if prices were falling, we’d call it deflation, and the same argument on the rate of decline would apply, with an inverse sign. The amount of time spent by economists pointing out this trivial point is mostly an attempt to assure each other, and policymakers, that the spectacular CPI and PPI headlines we presently see on the screens are nothing to worry about. It follows that slowing the pace of asset purchases, not to mention raising interest rates, would be a grave and unforgivable error.

Comments

[JRS5]

Um, yes it does mean inflation is increasing if prices are. That is the very definition. It also means that whichever party is in control when this happens (especially "non-inflationary" staples like food and gas) will get hammered in the next election.

[Salmo trutta]

There’s reflation and then there’s inflation. One creates a better balance, the other is destructive. People point to specific prices, or sector specific, lumber, cars, meat, oil, etc., as not represented by other across-the-board increases in prices. But if these prices are validated by the FED, by either an increase in the volume of new money, or the velocity of money, then these price rises will not fall back to anything near their previous lower 2019 levels.

The 1973 oil price supply shock was one such prime example. Monopolistic price practices by OPEC and non-OPEC producers, which administer an upward shift in a price, will in the longer-term, not be inflationary, but will be deflationary, unless monetary flows “validate” these specific price changes (pro-rata share of Yale Professor Irving Fisher’s price-level).

Because of the highly inelastic demand for most petroleum products in the short-run, any upward administration of prices deals the economy a “double-whammy”. I.e., the coefficient of demand for an increase in gasoline prices results in a small decrease in consumption. I.e., raising prices increases total revenue; decreasing prices reduces total revenue.

If that conclusion seems obvious, it isn’t. In the demand schedule of all products and services, there is an elastic segment. At some level, an increase in price reduces total revenue, and vice versa. I.e., if during the upward spiral of oil prices, money flows don’t increase, there will be a diversion of purchasing power from non-petroleum products. The economy will experience, in varying digress, an economic deceleration within certain industries based on a shifting basket of consumer goods.

To say that rising oil prices are inflationary is to ignore the fact that inflation is primarily a monetary phenomenon (an excess of money over the supply of existing products).

[David de los Ángeles Buendía]

Hello @Claus Vistesen ,

You wrote: "To recap, just because prices are going up doesn’t mean that inflation is."

I am afraid that that is exactly what it means. When prices go up, that is inflation. The difficulty many people have with the word "inflation" it conjures up the situation in the United States between 1965 - 1984, "The Great Inflation")[1]. The inflationary pressures were mainly driven by the massive deficit spending on the Vietnam War. The US economy was expanding, monetary velocity was climbing, and the mass costs of the war were driving up inflation. People fear that there will sustained periods of very significant inflation. The cause of the inflationary pressures today are quite different from those of a generation ago.

[1] files.stlouisfed.org/...

[wald22]

FED speak, transitory means it moves from one thing to another. As one thing goes up, another comes down.

For most of us people, it means short lived. But the reality is that transitory is just another word that prices are transiting (moving) higher