As 2022 quickly progresses towards the end of a turbulent first month for markets, it appears that the transitory vs. persistent inflation debate, which was a hot topic for financial markets in the late summer and early fall of 2021, is coming to a close: Inflation has been more persistent than a transient and impermanent blip in an otherwise vibrant economy.
The Federal Reserve described high inflation rates as transitory as recently as November, and while some analysts remain firmly seated on the ‘team transitory’ sidelines, the Fed has now backtracked away from the term.
Even as both economic analysts and the Fed itself have omitted the “T-word” from their respective lexicons, questions remain regarding exactly how long high inflation will persist. Investors might be wise not to hold their breath, says Key Private Bank Chief Investment Officer George Mateyo.
“The economy and the Fed are going at different speeds right now,” he told Yahoo Finance Live in a recent interview. “There’s probably a few people that still think that inflation is somewhat transitory, in our view it’s going to be a bit more persistent.”
High inflation rates are still likely to subside in the long run, according to Adam Posen, president of the Peterson Institute for International Economics. However, this might not eliminate problems with the Fed’s ability to effectively communicate with the public.
“They’ve got a problem because inflation is likely to still be ‘transitory’ in the common economic sense,” Posen told The Washington Post last month. “But they set themselves up and they trapped themselves, and it makes it harder for them to say [to the public], ‘Now look through this.’ ”
Three reasons for persistent inflation: labor prices, housing market, and high entry prices
Markets will likely continue to struggle with high inflation in the near future as the labor market faces supply-demand imbalances and real estate prices continue to rise, Mateyo said.
“From our view, I think inflation is going to stay a bit hotter for three reasons,” he said. “Labor prices are gonna continue to pressure economies and that’s gonna be with us for some time. Secondly the housing market is just roaring and that’s also gonna be an inflation headwind, and then [thirdly], entry prices are somewhat of a wildcard but we think they’re gonna be moving higher as well.”
The Fed has vowed to employ an aggressive approach to inflation in 2022, with the majority of members of the FOMC’s November meeting forecasting at least three Fed rate hikes this year. Philadelphia Federal Reserve Bank President Patrick Harker said he would be open to raising rates more than three times this year, if deemed necessary.
“Just how aggressive [the Fed] will be, though, will really hold the key for what the economy does going forward and how the markets perform thereafter,” Mateyo said.