In the past couple of months, we have often heard that economists believe that the higher-than-expected inflation numbers are being “transitory.” 🎢

However, more and more experts have come out recently saying that authorities, the US Federal Reserves, in particular, need to be more precise when it comes to describing what “transitory” actually means. 🤔 Is it months or years?

Record inflation

This year, the world is grappling with the biggest inflation in the last 40 years. For the month of November, inflation rose 6.8% from a year ago. 🤯

• The cost of goods, services, food, and especially energy is going up and up. It is now becoming clear to everyone that there are no signs of things going back to normal when it comes to price inflation.
• The loose monetary policy, applied by absolutely all major central banks globally to support the economic rebound in a response to the COVID-19 pandemic, yielded excessive liquidity.
• Stimulus checks distributed by governments across the globe also helped prices surge in response to higher demand.

The Fed's opinion

Both Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen spoke about this issue publicly recently and both of them agree that the term “transitory” should be retired.

“We tend to use [transitory] to mean that it won’t leave a permanent mark in the form of higher inflation,” Fed Chairman Jerome Powell said on Tuesday. “I think it’s probably a good time to retire that word and try to explain more clearly what we mean,” he added.

Is it here to stay?

Some analysts believe that the effect of pent-up demand, a situation where demand for services and goods is unusually strong, is likely to continue to support strong pricing. On the other hand, prices would need to drop from current levels for us to return to the pre-inflation situation, which appears unlikely at the moment.

Some companies have been able to pass on the higher costs of production to consumers, which directly results in high inflation. Hence, strong pricing may be here to stay as these companies may be reluctant to lower pricing as consumer sentiment still remains strong despite higher prices. Moreover, a mismatch between supply and demand would also have to disappear.

As a result, it appears more and more likely that the word “transitory” should be retired. 🏦

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