What Does ‘Transitory Inflation’ Really Mean?

The comments below are an edited and abridged synopsis of an article by William J. Luther

“No one denies that inflation has been higher than usual in recent months. The personal consumption expenditures price index (PCEPI), which is the Federal Reserve’s preferred measure, grew 4.4 percent from September 2020 to September 2021 and has averaged roughly 2.98 percent growth per year since January 2020. The disagreement today is whether this inflation is permanent or transitory. However, there is some confusion over what the term “transitory” actually means in this context.”

What Does ‘Transitory Inflation’ Really Mean? - BullionBuzz - Nick's Top Six
A man looks up at a chart with the word transitory written on an upwardly pointing arrow. The reference pertains to the Federal Reserve’s position that inflation is in a transitory phase.

“In what follows, I identify two potential uses of the term transitory to describe inflation. In the first sense, inflation is described as transitory so long as the rate does not remain high permanently. In the second sense, inflation is described as transitory only if the temporarily high inflation is followed by temporarily low inflation, which restores the old price level trajectory.”

Up for discussion: Transitory inflation with a permanent price level effect; transitory inflation without a permanent price level effect; and inflation in the real world.

“Whether the Fed will conduct policy to render the recent episode of inflation transitory in either sense of the term remains to be seen. My view, informed by market expectations, is that the rate of inflation will eventually decline to something in the neighborhood of 2 percent. I do not think the Fed will take the actions necessary to bring the price level back down to where it would have been in the absence of the pandemic and corresponding policy response. If I am correct, the increase in the price level observed over the last few months will be permanent, even though the high rates of inflation are transitory.”

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