I’m So Tired of the Transitory Inflation “Debate”

In Epsilon Theory notes, we use a lot of images of politicians and bankers shaking their fingers at us, because it’s a great way to communicate what we mean by Fiat News – the proclamation of opinion as fact. Fiat News is to hard news what fiat money is to hard money, and like fiat money, it’s a dominant transactional medium in modern human society.

When a famous person shakes his or her finger at you, they’re not telling you a fact.

They’re telling you how to think about a fact.

For the past six months or so, the Federal Reserve and US Treasury have made a concerted and highly intentional effort to shake their collective finger at us and tell us how to think about inflation. This effort to encourage doubleplusgood thinking about inflation has a number of tenets, the most fundamental being that there’s really no need to think about inflation at all. Every measurement you see about inflation in 2021 is impossibly corrupted by the year-over-year comparison to a pandemic-depressed economy, so it’s probably best if you just avert your eyes entirely. To the degree you do peek at the numbers and think about inflation, rest assured that it will be “transitory”, and to the degree it’s not transitory, rest assured that it is actually a good thing and what the Fed wanted all along, and to the degree it’s not a good thing and what the Fed wanted all along, rest assured that the Fed has all the “tools” it needs to bring this puppy to heel.

I’ve put the words “transitory” and “tools” in quotation marks, because these are articles of faith, not real words with real meaning as we might use them in the real world. They are tautologies, meaning that they are by definition always true and impossible to prove wrong. Of course inflation is transitory. Everything human is transitory. Of course the Fed has all the tools it needs. The Fed can literally do anything it wants with the made-up entity we call the US dollar. This “debate” (again quotation marks, because again the word is being used in a way that has no real meaning) over the is-it-or-isn’t-it transitory nature of inflation is just utterly tiresome. It’s full of sound and fury, and yet it signifies nothing.

Here, let me clear this up for you: over the weeks and months and years to come, the Fed and its Renfields will shake their collective finger at you and proclaim that, indeed, inflation was transitory and their tools worked exactly as planned. They will point to certain aspects of the real world as evidence. They will speak the magic words of “transitory” and “tools” with new inflections and slightly differing emphasis. Many market participants will believe this to be true. Almost all market participants will act as if they believe this to be true. This is how common knowledge works. This is how the game of markets works.

The proclaimed real world – the Fiat World – will always conform to the tautologies and articles of faith of a theocracy, not the other way around, because that’s what it means to have an institutional structure built around faith. This is true whether you’re talking about an institutional structure built around faith in a god, an institutional structure built around faith in a sports team, an institutional structure built around faith in a political ideology, or an institutional structure built around faith in the social scientific management of an economy.

There are two ways in which Fiat World conforms to a tautology – either the common understanding of that tautology is stretched to include whatever the real world is presenting (“you thought transitory meant six months? foolish child! everyone knows that transitory means eighteen months!”) OR the measurement of the real world is constrained to fit within the common understanding of the tautology (“after adjusting Patrick Mahomes’ stats, removing outliers to project the future, he heavily regresses to around the level of 2018 Dak“). The former can be costly if you have formidable political adversaries (“sir, did you or did you not testify that transitory meant six months? perhaps this transcript will refresh your memory.”), so it’s usually a last-ditch effort by the incumbent clergy. But the latter is just tweaking one cartoon (literally, an abstraction of an abstraction, like a statistical representation of an NFL quarterback’s performance metrics … or hourly wage data) for another. That’s easy. And that’s the stage we’re in with the transitory inflation “debate”.

The tweet on the left was put out by the Cleveland Fed yesterday, reinforcing recent tweets and New York Times posts by Paul Krugman, where he argues that a truer picture of inflation “inertia” can be found by further constraining the already-constrained personal consumption expenditure (PCE) cartoon of US inflation by eliminating the “outliers” and taking the median category’s inflation reading instead of an average of all the categories.

Here’s the Cleveland Fed chart of median PCE (gold) versus headline PCE (green) and core PCE (blue) in greater detail.

To which I’d reply that the median high temperature in Portland this month was 82 degrees.

To which I’d reply that the Fed can use a median measure of inflation just as soon as I can pay a median measure of my bills.

More seriously, I’d reply that if median PCE were a truer picture of inflation, then why weren’t the HIgh Priests of the Fed Church calling this out in 2015 and 2016 when core PCE was running “stubbornly” low (that’s the favorite word for the Fed Church … stubbornly … like a mule that just needs to be whacked with a two-by-four), and median PCE was consistently running hotter than the Fed’s 2% target? But no, the constant message from Fed missionaries for the past decade has been that awkshually, “true” measures of inflation clearly show that the Fed should proclaim, not just more monetary policy accommodation, but MOAR! accommodation. The message has never been that awkshually, “true” measures of inflation show there’s nothing to be worried about. Until now.

More seriously, I’d reply that this is how inflation works, as a rolling series of shocks through one goods/service category after another, not as a steady increase across all categories simultaneously.

If you haven’t yet read Stephen Roach’s mini-memoir of the Arthur Burns Fed papacy, you really must. It’s chef’s kiss good. Here’s an extended quote.

The Ghost of Arthur Burns

When US oil prices quadrupled following the OPEC oil embargo in the aftermath of the 1973 Yom Kippur War, Burns argued that, since this had nothing to do with monetary policy, the Fed should exclude oil and energy-related products (such as home heating oil and electricity) from the consumer price index.

Then came surging food prices, which Burns surmised in 1973 were traceable to unusual weather – specifically, an El Niño event that had decimated Peruvian anchovies in 1972. He insisted that this was the source of rising fertilizer and feedstock prices, in turn driving up beef, poultry, and pork prices. Like good soldiers, we gulped and followed his order to take food – which had a weight of 25% – out of the CPI.

Burns didn’t stop there. Over the next few years, he periodically uncovered similar idiosyncratic developments affecting the prices of mobile homes, used cars, children’s toys, even women’s jewelry (gold mania, he dubbed it); he also raised questions about homeownership costs, which accounted for another 16% of the CPI. Take them all out, he insisted!

By the time Burns was done, only about 35% of the CPI was left – and it was rising at a double-digit rate! Only at that point, in 1975, did Burns concede – far too late – that the United States had an inflation problem. The painful lesson: ignore so-called transitory factors at great peril.

I think inflation is now well and truly embedded in expectations for wages and prices and the core assets of the US economy (cars and houses and stonks). I think the reversal of globalization and the expansion of fiscal stimulus provide powerful tail winds for those expectations. I think that expectations are the only thing that really matter. That’s what I think.

But I do not know what the inflation Truth with a capital T is today. Neither do you. Neither does Jay Powell.

The only thing I know is that it took about three years for Fiat World to be whittled away by the real world in the 1970s. The only thing I know is that it’s highly unlikely for that process to happen any quicker today, no matter what the real world inflation Truth might be. The only thing I know is that we will be “debating” the “transitory” nature of inflation and the efficacy of the Fed’s “tools” for that entire time. The only thing I know is that this is a debate that the Fed will always win, until an equally powerful institutional structure built around faith proclaims an alternative vision of the world with alternative tautologies and alternative articles of faith.

And then the real conflict begins.


To learn more about Epsilon Theory and be notified when we release new content sign up here. You’ll receive an email every week and your information will never be shared with anyone else.


  1. Great article. I think one of the most interesting points (which you allude to in your discussion of 2015/16 PCE) is why these debates don’t materialise when the shoe is on the other foot. In early 2020 we had just 3 months of negative mom CPI but there was no debate about whether this effect may be transitory and related to the temporary suspension of huge swathes of the economy.

  2. “The bank is something more than men, I tell you. It’s the monster. Men made it, but they can’t control it.” ~ John Steinbeck, ‘The Grapes of Wrath’

  3. The FED is omnipotent if you do not believe me just ask Jim Cramer.
    There is a little sushi bowl place around the corner from my office I hit it once a week for lunch - my sushi bowl and a water (same exact bowl every time) $12 bucks for the last few years, last month I was taken back when it was $15 , yesterday $17 !
    The Spaghetti Factory (I really need to quit eating pasta for lunch) I almost went into a carb coma Monday when I ate there. Anyway , no more lunch menu - so my $8 dollar lunch is now $15. Is the portion bigger? Maybe… its hard to tell.
    Fiat news is one of my favorite notes of all time , and I think Ben is correct to adjust that to a fiat world!
    I do see signs that people are realizing how much misinformation they are being fed.
    I have many retail clients and the majority now openly joke with me about fiat CPI numbers - this is new.

  4. Edit the FED is also omniscient.

  5. That Arthur Burns was a comical genius!

    That aside, thanks for introducing me to the concept of inflation being a “rolling series of shocks through one goods/service category after another.” I’ve not come across that explanation before and it completely reframes the current inflation debate for me! Thanks Ben.

  6. This conversation has been readily occurring at my place of employment. Most indicate it is all statistical because values were suppressed in 2020. My positioning is to stop framing the argument as “either/or”. We can have a statistical anomaly due to the lower inflation levels in 2020 as we “revert”, AND we can have actual inflation in the price companies and individuals pay for the things which much be purchased. I find it usually ends with me asking a question if they think the price they pay for groceries/education/insurance/housing has only meaningfully increased in recent months and do they expect those prices to meaningfully decline in the upcoming months/year.

  7. I appreciate much how you frame our receipt of the language from on high. I propose a simplistic language response to the tautology: PCE excludes the “volatile” components of food and energy. What else do we live on, besides food and energy?

  8. Yr/yr oil price comps through yr end are almost triple digits. Rent comps are going to be double digit through next spring as well.

  9. Avatar for Joel Joel says:

    The Fed can do QE to any extent they deem reasonable. QE supports ALL assets - stocks, bond prices, real estate, and even collectibles like Bitcoin. However, the Fed cannot manipulate the markets forever. When the data on inflation becomes so apparent and so persistent that Powell is embarrassed into stopping QE then the bond vigilantes will have a less expensive proposition to enforce the free market price discovery of interest rates. At this point, Powell can keep the short-end at zero as long as he wants and create whatever false narrative necessary but he will be too embarrassed to do QE. So at some point, the markets - not the Fed - will run monetary policy. Until the GFC and the crossing of the Rubicon with QE, markets forced the Fed. What QE does is to suspend free markets. Congress controls the purse. QE should be removed from the Fed’s unilateral hands.

  10. From a family member who works at a large, rural resort - We can’t find cleaners because normally all those jobs are filled with summer temps from overseas. So the local cleaners’ pay was raised to $25/hour. Then the front desk people heard about it and were, like, wait what? I should get paid more than a cleaner (most have degrees). So they got bumped…but then some of them were starting to approach the pay of managers. Etc, etc. All this happened in last few months. Maybe the lack of temp cleaners is indeed transitory to some extent but the wage increases they triggered won’t be rolled back.

  11. Well…thanks to you I went out and looked at the Shadowstats inflation numbers. 9% is the least bad calculation. Now I hope I can afford the aspirin.

  12. Inflation will come and go, never shall prices rise.

    Inflation will come and go never, shall prices rise.

    Just omit the comma in the transcript and then ex post facto profess your ‘vision’. 

  13. time dependent supply chain shocks

  14. As usual a lot of words but no conclusion…

Continue the discussion at the Epsilon Theory Forum


The Latest From Epsilon Theory


This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.

Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.