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Everyone is using the t-word in describing the high inflation of the COVID-19 recovery period: transitory.
Politicians are using it, academics are debating it, and companies are referencing it. The term has been most heavily used by the Federal Reserve, the economic steward that has tried to reassure Americans that the rapid pace of price increases will moderate in time.
The question is: How long will it take?
“The t-word, I guess it shows people have different definitions of ‘transitory,’” Whirlpool CEO Marc Bitzer told Yahoo Finance on Oct. 22. “I’m not quite sure how long you would define transitory these days.”
Merriam-Webster says the word means “of brief duration” or “not persistent,” meaning there’s no test for exactly how long something would have to last before it can no longer be considered “transitory.”
But for the Americans who feel the impact of rising prices, almost six months of elevated inflation have stirred some impatience with the use of the t-word.
Where did ‘transitory’ come from?
The word itself became a heavy talking point in the spring and summer of 2021.
Prices started to skyrocket in the latter part of the spring, as the economic reopening opened the floodgates on consumer spending. But the sudden and massive rush of demand could not be met by suppliers; shortages of raw materials made it difficult to make finished goods, and those that were finished could not be shipped amid bottlenecks at ports.
The Federal Reserve, tasked with steering economic policy to handle inflation and employment, described the pressures as transitory. In April, Fed Chairman Jerome Powell warned of “upward pressure on prices from the rebound in spending,” particularly with the supply problems.
“However, these one-time increases in prices are likely to have only transitory effects on inflation,” Powell said on April 28.
How long until ‘transitory’ becomes ‘persistent’?
Price pressures remained high through the summer and into the fall, with readings on the Consumer Price Index remaining above 5% on a year-over-year basis. Another reading of inflation, the Personal Consumption Expenditures Index, remains above 4% on a year-over-year basis. For reference, the Fed’s inflation target (measured in PCE) is 2%.
In the absence of smaller prints on inflation into the later months of 2021, the tone from the Fed started to turn. Fed officials appeared to acknowledge that inflation was lasting longer than originally anticipated.
“There is a general concern that this is going to last longer,” Fed Governor Christopher Waller told Yahoo Finance in late-August. “Supply bottlenecks that we’re seeing are not unraveling as fast as we thought they would, we’re seeing a little more wage pressure, starting to come through.”
In November, the Fed tweaked its policy statement to note that inflationary pressures are not “transitory” but “expected to be transitory.” The change signals the view within the Fed that there’s a chance that its call for transitory inflation could prove to be wrong.
Would a year of high inflation readings still be ‘transitory’?
The Fed appears to think so. In November, Powell said he could see bottlenecks lasting “well into next year” before fading.
For businesses having to raise prices and consumers facing those higher price tags, a full year of high inflation readings may have more long-lasting implications.
“They don’t care about the transitory story,” SGH Macro Advisors’ Tim Duy noted on Nov. 3. “They care about what is happening now.”
For Powell’s part, the challenge lies in people having different definitions for transitory.
“It’s become a word that’s attracted a lot of attention that maybe is distracting from our message, which we want to be as clear as possible,” Powell said on Nov. 3.