Inflation Sinks In

Rising Floodwaters
“Deeply Entrenched”
Pervasive Inflation
When Will Inflation Actually Fall?
Continued Seepage
Cleveland and Other Parts

Remember when inflation was going to be transitory? Good times. I was in that camp myself early on, as were some serious analysts I greatly respect (and still do). Then the data began to show core inflation would be stickier than expected, and I turned in my Team Transitory T-shirt. I appreciate people who admit their mistakes. We all make them.

Many who thought inflation had peaked made 180-degree turns this week after seeing the latest Consumer Price Index release. July data, which had seemed to look better, now looks more like a head fake. The August report showed no improvement and, in some ways, an intensification of the inflation pressure, especially at the core services level.

This shouldn’t surprise us. Once inflation gets started, stopping it is hard—even when the central bank has the necessary tools.

A central bank that already used its best options will have an even harder time. And that’s where the Federal Reserve is. The Fed’s own policies helped spark this inflation. Extinguishing it was never going to be quick or easy. Yet price inflation isn’t entirely the Fed’s fault. You could argue it stems from the giant COVID stimulus spending.

Inflation arises from a complex mixture of monetary policy, fiscal interventions, market psychology, and consumer choices. Today, we’ll explore those and think about what is coming.

Rising Floodwaters

The first thing to remember about inflation is that expectations and reality are two different things, but expectations matter a great deal. They influence the behavior in real, current time that generates future reality. You make plans based on your expectations, of weather or driving conditions or budgets. Inflation is the same. People make different choices when they expect more inflation.

Let me try to explain this with a metaphor. Suppose a giant rainstorm drops large amounts of water at the upstream end of a river. People in towns downstream, knowing floods are coming, will start evacuating and, if they have time, try to protect their property.

Having done what they can, they will then wait for the flood to crest. Their behavior changes when they see the water stop rising. At that point, things still aren’t normal, but they know the worst is over.