Inflation – is it still transitory?

Richard Clarida, Vice Chair of the Fed, has assigned recent inflation developments into 3 categories.

• Round-tripping. Energy prices can explain a large part of      the recent increase in headline inflation, but the impact will fade unless      energy prices double again in the next 12 months

• Reopening bottlenecks. Supply-side constraints have resulted in some      goods’ prices rising sharply in recent months, e.g. car prices /      semiconductor shortages. This has pushed inflation sharply higher in the      US, slightly higher in the UK but has had little impact in the EZ. There      are some signs that these effects are starting to ebb.

• Housing and rents. Housing has emerged as a new source of      potential inflation pressure. Rents have depressed US inflation over the      last year, but this disinflationary effect is now starting to reverse with      owners’ equivalent rents starting to rise rapidly.

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While inflation is likely to decline next year, this could mask an underlying rise in the trend. The more critical question is where it will settle. There is some evidence developing that the underlying rate of inflation in the US is moving a bit above 2%.