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Transitory inflation

Nice post on inflation. I wonder if the housing market worries you at all? I know that you think that the inflation is likely to be transitory, but what if the housing market price appreciation isn't transitory and turns into a bubble? How likely is that?

While Cullen's larger point about the difference between the way the fed sees things and the way humans see things is all good and well -- part of it is clearly wrong, as applied to this particular situation.

Many (most?) aspects of today's higher inflation is not due to a "hot" economy or other factors that will leave higher prices embedded. They are due to various supply chain issues caused by COVID. For example, I just bought a new car. Supply chain issues and resulting limited supply have driven up the cost. If I were smart enough to buy that car six months ago, I would have paid at least 10% less. If I were willing to wait another six months, I would pay perhaps 5-10% less. That is very much "transitory" as it's not just going to slow down from current highs, it will actually decrease back to close to prior norms.

If you drill into the data, nearly all of the inflation that's higher than normal is in energy, vehicles and transportation services. Now the gas part of the equation may or may not be transitory ... but the rest of it definitely is.

The Fed has missed its 2% inflation target for what - most of the last ten+ years?  I agree that much of the inflation we're seeing now is transitory - even if that's a lousy way to describe it.  I do think some of it will stick a little.  Wages for lower skilled jobs seem to be going up.  McDonald's may end up employing fewer workers in a given location - but wages are going up a bit - so hamburgers and fries will cost more.  As to residential real estate, my own opinion (unqualified) is that it will soon level off.  Affordability at the lower end is already a problem in many parts of the country.  Unlike the real estate bubble that burst 2009 - there are a lot more cash buyers and buyers with plenty of equity (higher down payments) - so I doubt we'll see a major crash in housing prices.  I know rents are going up too - but affordability is a challenge there - and landlords run the risk of having more empty units.  I'm more concerned about fiscal policy than monetary policy when it comes to inflation.  The Democrats are pushing so hard on new (expensive) programs that I am concerned the world will begin to lose confidence in our government's ability to keep so many plates spinning.  As Cullen has written several times - harmful inflation happens when a currency is essentially rejected.  I'm not worried about hyperinflation - but if the world ends up believing the USA's best days are behind it, and that we going to settle into a stagnant economy held back by all the costs the Democrats want to burden us with (and that won't be paid for by the "rich" or "rich corporations"), then the reduced confidence will show up at the Treasury auctions.