Is "Transitory" Becoming an Unwelcome Guest?

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Because of its imprecision, The Fed chose the word "transitory" to describe rising prices. Transitory can mean hours, months, or decades. Using transitory versus a specific period provides the Fed freedom to be wrong but grammatically correct.

While the Fed uses ambiguous words, Mr. Market has more defined expectations. If investors grow impatient with the Fed's transitory, bond markets will react. In such a case, how will the Fed respond to "enduring" or "lasting" inflation coupled with higher yields? If they are already tapering, will such conditions push them to speed up their pace?

Conversely, recent data shows inflation may be stabilizing. Maybe the Fed is correct, and inflation rates will normalize in the coming months. If so, will they hold off on tapering or reduce the rate of tapering?

In July, I wrote Just How Transitory is Inflation? The article is a deep-dive analysis of the CPI. At the time, I sought a better understanding of what was causing inflation to rise. With two more months of inflationary data, an update is essential.

Understanding inflation beyond the headlines helps us answer the all-important question: How transitory is transitory? From there, we can assess potential Fed and market reactions.

Headline CPI summary

In the latest CPI report, covering August, the monthly CPI figure rose by 0.3% or 3.6% annualized. The year-over-year rate is +5.30%. In comparison, June's monthly CPI rose by 0.90% or nearly 11% annualized. Despite the big difference in monthly rates, June's year-over-year change of +5.40% is only 0.10% higher than August.

As shown, the monthly CPI and core (excluding food and energy) are turning lower. While not as pronounced, the annual data is following suit. Two months does not make a trend, but it is fulfilling the transitory definition. Core CPI, at +0.10% last month, is 0.10% below the average for 2017-2019. Headline CPI is only 0.10% above the average.

The headline data is supportive of the transitory narrative; however, it does not tell the whole story.

The breadth of CPI

Digging deeper into CPI and looking beyond the headline averages shows inflation is not transitory. The graph below shows the CPI Index based on the median price of the goods and services in the index. Unlike the headline CPI Index, the median CPI is still rising and at the highest level since 2008.

The distribution graph below compares June to August and shows how the prices of all the underlying goods and services within CPI are changing on an annual basis. I separate the data into 2% price buckets.

The blue (August) and orange (June) bars comparing the two months may look somewhat similar, but there are differences important.

In June, 75% of the CPI components were rising at a rate slower than the 5.4% inflation rate. In August, 71% were rising at a slower rate than the 5.3% rate of inflation.

The number of goods whose prices rose between 2% and 10% increased from 66 to 77. The number of goods whose prices rose by 2% or less fell from 72 to 55. While not obvious in the graph, the number of goods shifting to the right (more inflation) is noteworthy.

Among goods and services, 52 have had price declines from June to August. Six were unchanged, and 95 had price increases. Again, more goods are rising in price than falling.

The breadth of the market is not supportive of the transitory theme. A wide swath of prices are broadly rising, albeit not at an alarming pace.


In the original article, four goods had year-over-year price changes of greater than 20%, as shown below:

  • Used Cars 45.2%
  • Gasoline 45.1%
  • Fuel Oil 44.5%
  • Other Motor Fuels 32.1%