October 2021 Inflation | Page 4 | General financial discussion | Discussion forum

As Loonie and I bantered earlier..... we will have to wait and see how Spring 2022 looks. For now, I am not going to scream 'the sky is falling'.

I have a smallish DB pension that is not COLA'd at all, so I stand to lose with inflation too on that aspect of my assets. I am thus not dismissing it either. I just think the current YOY numbers don't reflect ongoing 'rolling average' reality.

Just curious, but how do you guys define "transitory"? I'm asking for days, months or years.
I wish I'd thought to ask this back in about April or May when inflation began exceeding its target 2-3%.
The economist at the Fed and BoC won't commit themselves to an answer. They just keep repeating that it's transitory and that they don't know how long transitory is. So I conclude their definition is endlessly elastic and therefore meaningless.
We can't really discuss whether it is transitory or not if there are no clear and agreed criteria.

We are now told to expect high inflation to continue for at least six months in 2022. Add this to 2021 from April and you have 15 months. It is now going to impact Cost of Living adjustments for DB pensions including CPP, and other benefits and annually rated expenses. One thing I feel sure of is that these increases will not be transitory. So, in my mind, we have likely already exceeded "transitory".

Transitory is when the rate of recent cost increases decelerates back to historical rates. Inflation was far too low in last 6-8 months of 2020 and first 3-6 months of 2021 relative to desired inflation of 2-3% and relative to the years that preceded it. We are still in catch up mode until Spring 2022. Norman's wage graph is ONE example of this where wages are not yet back on trend to what they would have been if there had been no pandemic. There are no doubt similar graphs of this for a host of goods and other services, all looking a bit different in shape and timing and effect. That is what makes up the CPI.

Those who have been supporting the transitory theory know that after acceleration to 'catch up' to the trend line that was broken in early 2020, rate of increases in goods and services should decelerate back to 2-3% range. That makes them transitory. Cost of living adjustments that didn't happen in 2021 as a result of essentially zero inflation in 2020 should now happen in 2022 due to 'catch up' of cost inflation in 2021. That is as it should be to get back on trend with previous years. For example, we might have had a TFSA contribution increase to $6500 for 2022 had 2020 and early 2021 inflation been on trend but it didn't. We can perhaps expect that to happen in 2023 due to the surge in CPI in 2021 and early 2022.

What we don't know is whether some of the cost increases we have been seeing since early 2021 will decelerate back to 2-3% trend in early/mid-2022 or whether they have become structural in nature. Will some of the havoc we are seeing in the shipping industry with inefficiencies and latent costs go away back to a harmonized global trading system? Or will some inefficiencies remain in both marine and truck shipping? Will the pandemic retreat such that assembly lines for the production of consumer goods not be repeatedly interrupted do to lack of timely resources? The semi-conductor shortage is a prime example that causes interruption in autos, electronics, etc that idles production lines, increases costs and results in inventory shortages with minimal retail discounting. Try to get a discount on an auto dealer's lot these days, even on used cars. My 2007 Infiniti is worth more today than it was a year ago. Will its value suddenly plummet again to where it should have been on the trend line in 2023 when new car inventory reverts to normal? Will the health system permanently incur more costs due to permanent presence of covid-19, more ICU use, more vaccines, better LTC care for our elders?

I suspect the world will not totally retreat back to its 100% efficient self that existed pre-2020, and for good reason in some cases like health, so some structural inefficiencies will remain in place with their increased costs. That is what I think central bankers are becoming more concerned about. Have we changed the system of supply of goods and services permanently in some cases such that some higher costs are here to stay? How large is it? Does it warrant intervention?

At this point, no one quite knows what will remain of transitory inflation and what will be ultimately become a reset on structural inflation. If YOY inflation numbers fall back to the <3% range by Spring/Summer 2022, we will know most was essentially transitory.

Vatox said
There is no question that inflation will eventually go back to target. The only unknown, is whether the ending of this transition will be with prices back on the initial trajectory line or on a permanent higher one.  

I can agree with you on that thought. I suspect there will be a bit of a step change that parallels the old trend line but may be slightly higher. Health care costs for one that should never go back to where they were (the tragedy of elder care, permanent need for covid vaccines). Perhaps certain supply chains for another where cheapest sourcing overseas, e.g. chip manufacturing, may not be smart strategically. Perhaps keeping more inventory rather than just-in-time. Better HVAC systems to keep covid at bay. Higher energy costs due to carbon taxes and ideological imposition of EVs and ideological retirement of cheap sources of electricity. Or maybe consumers will start to realize they don't need as much consumption as they used to do pre-pandemic and help save our planet in the meantime There are a number of reasons to believe why there could be some minor resets.

I am just not prepared to fall for 'the sky is falling' every time a 'high' monthly YOY inflation number comes out, at least not until late Spring 2022.