Base Effects & Bottle Necks = Transitory???
Macro Perspectives: Mon 19 Jul 2021
Both Jay Powell and Janet Yellen publicly promoted the "transitory" case for inflation last week - they will not flinch in the face of obvious data and real world observations of rising prices.
They continue to dismiss it on the grounds of "base effects" and "bottlenecks." They say price data only looks high because it's measured against a very low base of last year, when the economy was virtually shut down ("base effects"), and then they go to the supply chain "bottlenecks" argument - the disruption in the supply chain will normalise.
All reasonable, however, they never talk about the 30% growth in money supply. There is 30% more money in the economy, chasing a relatively fixed (more like smaller) amount of services and goods. That's inflationary.
Meanwhile, both Powell and Yellen (the Fed and Treasury), can't see any reason to be concerned about expanding the money supply even further, with additional multi-trillion dollar deficit spending packages. They support it and Yellen promotes it (not surprisingly, as part of the administration).
What they both continue to talk about is this concept of "inflation expectations." In normal times, if the Fed can do a good job manipulating consumer confidence in a way that produces a perception of stability for consumers, then they can manage behaviors, and therefore prices, to achieve their desired outcome (stable prices). At least they strive to do that. That's why they fear moves in inflation expectations more than the inflation data itself.
In this case, things aren't exactly normal. We have an economy that's on fire, and we have excess money sloshing around, with more coming.
Still, they seem to think they can manipulate perception, to get their desired outcome. As far as they see it, as long as you don't think prices are going to run away, you'll behave normally in your consumption (i.e. you won't spend hastily to save against higher prices and you won't big UP prices in bidding wars).
So they are constantly telling us that these rising prices are temporary - no need to rush out and buy that widget now.
In addition, the Fed seems to be using a tool that is in their complete control of right now, to send a message to people - the Treasury market. They have pinned the yield on the 10-year Treasury note back down to 1.3%, in the face of an economy running at better than 7% growth and in the face of prices (on a month-over-month basis) rising at a double-digit annualized rate.
This chart has the institutional community confused and becoming manipulated into believing there is no inflation problem. They think market forces, in this chart, are giving them a message. More likely, the Fed is giving them a direct message: "promote a tame inflation outlook." With that, a July fund manager survey says 70% of fund managers think inflation is temporary.
