How Long is Transitory?

Economic Summary

How Long is Transitory?


The Fed has pledged to remain patient with inflation and interest rate policy so long as pricing pressures remain transitory as opposed to persistent. This of course begs the question, how long is transitory?

Bradley A. Ruppert, CFA®
Executive Vice President
Chief Investment Officer
513-932-1414 ext. 59105
bruppert@LCNB.com
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Based on recent Fed minutes, an accommodative rate policy will likely last at least through the end of the year. The most recent Consumer Price Index (CPI) data shows an increase of 5.4% over the past 12 months with supply and demand disruptions continuing to reverberate through the economy. The most recent example of supply disruption is coming in the form of a massive shipping bottleneck off the coast of California. Retail shelves are already looking rather bare, and we question if all these goods will be offloaded and in stores before the holiday shopping season. If Santa’s sleigh doesn’t get off the ground, what will this do to consumer confidence and the price of goods?
The supply of goods and services in the economy relies heavily on a still recovering labor market. Just as stimulus checks run out and send some people back into the labor force, a looming vaccine mandate might cause others to return to the sidelines. The most recent data from the Bureau of Labor Statistics shows the unemployment rate down to 4.8% and wage gains running at a 5.5% year-over-year rate. With aggregate employment still down about 5 million from pre-Covid levels, wage gains should remain above average for the near-term as businesses struggle to fill employment vacancies.
While the aggregate supply of goods is clearly strained, it appears that aggregate demand is running ahead of the long-term trend as shown by the St. Louis Fed chart of U.S. Personal Consumption Expenditures. And why wouldn’t demand be strong? According to the FDIC, total bank deposits in the United States are at $18.7 trillion or more than 33% above the pre-Covid level. The American consumer balance sheets are awash with liquidity and primed for spending. Trillions of dollars from Fiscal stimulus over the past 18 months sits on the sidelines ready to be spent on an economy struggling to provide enough goods, services, and labor. Revisiting Milton Friedman’s definition for inflation, we clearly have the potential for “too much money to be chasing too few goods and services”.
Given the backdrop above, we see no reason for near-term relief in either CPI data or wage gains. Real (after inflation) economic growth requires some combination of a growing labor force or growth in productivity. Growth as measured by the Atlanta Fed’s GDPNow estimate appears to be slowing. After running at close to 6% on an annual rate through most of August, the economic forecast has stalled to just 0.5% at its most recent reading. Fiscal and monetary policy makers deserve some credit for keeping the economy afloat during an unprecedented crisis. However, we may now be in for a period of slowing real growth as we wait to see just how temporary these inflationary pressures are. Shock waves tend to dissipate as you get further from the epicenter. The Fed seems content for now to ride out these waves in anticipation of more normal conditions ahead. The easy monetary policy and still recovering labor market should keep the economic expansion going for the time being, but it may be at a slower pace.