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Felix Wintle
Fund Manager
The debate around whether inflation is transitory or not is a strange one because no one has defined what ‘transitory’ means. They also have not defined inflation’s starting point, so there is a general irrelevance about what many of the talking heads on TV and in the media say, as there is no context to the debate. In my view, the starting point for inflation is not when the media starts reporting on it or indeed when the Federal Reserve deigns to acknowledge it, it is when the rate of change in the data starts to inflect higher, and this happened back in Autumn 2020. If we take this as the starting point, way before the consensus was talking about it, and say a reasonable definition of ‘transitory’ is six months, the question is moot as inflation has already been a factor for some 9-10 months.
There are clearly some parts of the inflation picture which will correct over the next few months. Used car prices for example have seen some of the starkest prices rises in recorded history, but these are likely to come down again once bottle necks clear. The same can be said for air fares. Lumber too, despite having corrected over 50% from its recent highs, is still +82% on a year over year basis. But these are not material inputs to the CPI; much more important is the cost of shelter which counts for 33% of the CPI alone. As can be seen below, this is only just beginning to turn higher and typically follows home price appreciation which has been shooting higher over the last several months:
The price of oil is another key factor in inflation and whilst this will eventually correct as it always does, it is now trending higher and has easy comps over the next several months.
Added to this there is the labour situation. Employment numbers are set to surge over the next few months as stimulus payments come to an end. Approximately 3m people receiving extra aid will see those cheques stop in July and August and they will be stopped nationally by September.
This will have the effect of forcing people back to work, but back to jobs paying higher wages.
These upward pressures on the cost of shelter, on the price of oil and on wages and labour are likely to keep inflation higher for longer.
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