The recent inflation trend is stretching the boundaries of what it means to be 'transitory', but how much of that matters?
The elephant in the room continues to be inflation talk as we navigate through the opening stages of Q3 and 2H 2021, and the key question remains whether the elevated price pressures we are seeing is going to be 'transitory' or more sticky?
The consumer price inflation figures globally have shown a material rise and that has already caused many central banks to start addressing the issue, with the RBNZ, BOC, and now BOE looking to normalise policy as the economic recovery kicks off.
That said, the Fed is still preaching patience and that is arguably the only thing that really matters in the context of the overall market right now.
A look at Powell's speech last week in case you missed it:
- Powell: Fed lacks certainty on transitory inflation but believes it to be the case
- Fed's Powell: Monetary policy will deliver powerful support until recovery is complete
- Fed's Powell: We don't know where labor force participation will settle
There are still many market watchers that believe that the Fed is right to dismiss the latest rise in inflation, especially when you drill down to the details of the inflation report as over the past few months.
Used car prices are an example to blame when viewing US CPI data but then again, even if that reverses, it is tough to argue against persistently higher inflation pressures elsewhere especially when supply chains are experiencing severe disruptions globally.
Come what may, this supposed 'transitory' period in inflation may not be that transitory after all i.e. proving to be more sticky than what the definition is.
However, the key factor when viewing all this is still the Fed and while it may be harder for Powell & co. to keep ignoring the data and what the trend is saying, at the end of the day it is their narrative that matters most to the market.
As such, the debate on whether or not inflation is 'transitory' doesn't matter as much as what the Fed claims it to be - at least that is the case for now.
