Word of the Day – Transitory
Updated: Jun 17
By Jonathan Lawton
Managing Partner, OpenAir Advisers
There is a big argument on Wall Street right now regarding the sudden rise in prices. The cost of everything is going up from food, housing, gasoline; we have seen the price of lumber go up over 400% this year alone. But are these price increases going to stick around? The sound bite you would hear asks the question, “is it inflation or is it transitory?”
Inflation = Permanent, Transitory = temporary.
The NY Fed's monthly survey of consumers (immediately below) showed inflation expectations surge to the highest level in the survey's history (since June 2013) on a year ahead basis.
And rightfully so, we really haven’t experienced much inflation since the 1980's. The last two months reported for this year, April and May, is enough to spook anyone.
Bank of America’s Global Manager survey said 72% of investment managers think the rise in prices is transitory, only 28% think it is inflation. I think it was best described by David Frum, former speechwriter for George W. Bush, “A lot of people called it ‘inflation’ when it was really the lurches and spasms of disrupted supply chains returning to normal activity.” (Not political commentary, I just liked his quote)
We have already seen these expectations come down as prices for many of these items have peaked and started to come down as well. Lumber prices fell 18% last week, the biggest decline for active futures going back to 1986. Lumber has now dropped over 50% from the record high on May 7th.
So is it inflation or is it transitory? Consumers believe the answer to be inflation. Almost three quarters of investment managers believe the answer to be transitory. I believe the answer is somewhere in between; we will have some inflation, but the high-flying prices we have seen in certain areas should go back to normal over time. If it were truly inflation, we should see bond yields rising. As you can see from the chart below, interest rates rose as the economy began to recover up until the March, 2021 high of 1.87%. Since then they have come back down to 1.5% signaling that this is possibly transitory and not permanent.
Whether it is inflation or transitory, it is something to keep your eye on. In today's Federal Reserve meeting Jerome Powell, Federal Reserve Chairman, raised his expectation for inflation in the future but said he expects to keep interest rates near zero until 2023.
If you have questions about these or any other topics you can reach the author at Jon@openairadvisers.com