Q3 2021 Bond Compass

PriceStats® Analysis: Transitory Inflation Buzz

A look at quarterly measures of inflation, based on prices of millions of items sold by online retailers, to help investors anticipate and evaluate the impact of inflation.

Transitory inflation will likely go down as one of the most overused financial terms for 2021. We are now past the base effect peak for inflation and PriceStats is confirming that year-over-year measures have started their transitional journey, with prices having peaked in May. However, the timing to normalization is likely to take much longer than initially anticipated. As the chart shows, inflation in the US has run much hotter since the start of the year than anticipated, which will make the transitory process that much longer. In fact, if monthly price gains just match longer-term averages, the year-end 2021 inflation rate will still be higher than the peak expected at the start of the year. The Federal Reserve’s recent upgrade to its personal consumption expenditures (PCE) forecast is an acknowledgement of the extended normalization process that will push the structural-versus-transitory discussion into 2022.

PriceStats® Daily US Inflation Index and Forecast

Not all price surges are created equal

The headline-grabbing inflation prints out of the US are set to ease, with the bulk of the base effects now in the rearview mirror. This is already being reflected in our US PriceStats data series, which peaked at the end of May and has compressed by 30 bps over the past month. It is worth noting that the lockdown process has been unique at a national level, and therefore varying reopening timetables will impact inflation expectations. For instance, as the chart shows, it appears that US and Canadian prices are topping out, a consequence of a more aggressive lifting of restrictions. In contrast, Europe, only now reaching vaccination levels comparable to those in North America, continues to see rising inflation, with base effects in play until the fall. The comparatively slow vaccination rates in Japan should be viewed relative to their bottoming of prices at the end of last year. It will therefore take longer before we can ascertain whether prices are in fact transitory as practically every central banker espouses.

PriceStats® US, Eurozone, UK, Japan and Canada Inflation Comparison

Emerging market prices still rising

While there are signs that the transitory pricing message pushed by developed market central banks may in fact prove accurate, the same is not true within the emerging markets. As the chart shows, the PriceStats EM aggregate series not only stands at the highest level in the series’ history (back to 2010); it continues to push higher. While base effects are partially responsible, higher import costs, particularly commodity prices, currency depreciation and supply disruptions are also at play. Fortunately, most individual country readings remain within the range of central bank targets, although upward pressure will make it a question of how long policy can remain accommodative before normalization begins. For some countries, that time is already here, with the central banks of Russia, Brazil and Mexico having recently raised rates in an attempt to contain prices.

PriceStats® Developed Markets vs. Emerging Markets (right-hand scale)