Power & Market

Entrenched Is the New Transitory

It’s been said: if you can’t convince them, confuse them. When it comes to Jerome Powell discussing inflation, he is never in short supply of words. At the first Federal Open Market Committee (FOMC) meeting of the year, the Chair of the Fed set the stage for an end to easy money policies and voiced concerns over a new economic threat: entrenched inflation.

With transitory inflation becoming passe in 2021, it was only a matter of time until a new phrase was invented. Like its predecessor, it too is without economic merit. The difference between entrenched inflation, as opposed to transitory inflation, and what can only be called regular or your garden variety inflation, is without delineation. 

He introduces the idea, making it seem as though he’s protecting the country from a form of inflation that could persist for long periods of time:

We will use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.

He doesn’t explain how he will fight entrenched inflation differently than other types of inflation. However, the Fed claims when (price) inflation is high, the central bank will raise interest rates. Despite the questionable theory behind this, it’s a long-standing belief held by central bankers worldwide. So far, the Fed has done a poor job fighting all forms of inflation. Consider the puzzling scenario when the Consumer Price Index (CPI) reached 7% in December, its highest level in 40 years, well past the arbitrary 2% target. Yet, Powell refused to raise rates this January.

Referring to inflation, Powell admits the Fed’s previous take was wrong, but offers assurances that this time they’re prepared to fight the economic phenomenon of rising prices, saying:

We do realize that… inflation has persisted longer than we thought. And, of course, we’re prepared to use our tools to assure that higher inflation does not become entrenched.

Reiterating a third time how the Fed will utilize their tools to ensure inflation doesn’t increase too much implies that the current 7% inflation rate is not high enough. A state of confusion is really all that remains:

I think the path is highly uncertain in that we’re committed to using our tools to make sure that inflation, high inflation that we’re seeing does not become entrenched.

To add insult to injury, the money supply continues to have no effect on price increases. Powell’s aloofness on the connection between the money supply and prices is put on display when he tells us:

…the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic, price increases have now spread to a broader range of goods and services.

As far as they’re concerned, inflation must exist in a Goldie-locks zone, or a sweet spot where it is not too high or too low. After a couple of decades of persistently low inflation numbers, the Fed finally got what they desperately desired. Unfortunately, they’ve failed to inform society why 7% is an acceptable inflation rate, especially since the Fed takes credit for managing inflation.

Last year inflation was transitory, this year it could be entrenched. Regardless of what modifier is used, (price) inflation compounds. Unless there is negative inflation, or deflation, the compounding effects only exacerbate year over year.

Unfortunately, the Fed will never be able to fight inflation because they do not understand inflation. New phrases like entrenched inflation or transitory inflation are used to create an air of confidence for those who don’t understand economics and confusion for those who do.

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