Taps Coogan – June 21st, 2021

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We started warning in the early days of the Covid Pandemic that inflation risked rising sharply and have kept repeatedly warning about it ever since. Now, CPI inflation has climbed to just shy of 5% in May, the highest level since 2008, and may not be done spiking.

However, we’ve also been careful to note over and over that this inflation wave may very well end up being transitory. No, consumer prices are not going back to what they were before. The loss of purchasing power is always a one way street and no, transitory inflation doesn’t mean a single solitary month of hot inflation. It’s going to last longer than that. However, the irony of excessively accommodative monetary and fiscal policy is that, while they are reflationary in the short term, they are highly deflationary (for growth and interest rates) in the long term as it leads to over indebtedness and mal-investment.

The punchline is: So long as the Fed thinks inflation is transitory, it will be surprisingly stiff. Once they start to doubt that it is transitory and ease off the gas, it will start to become transitory. Based on this weeks’ Fed meeting, they are having second thoughts about the transitory narrative.

Within that context, David Rosenberg of Rosenberg Research recently spoke with WealthTrack’s Consuelo Mack about why he believes inflation expectations have gotten too high and why the economy is headed for a nasty hangover.

The interview is worth listening to in its entirety and, while I am less convinced about Mr. Rosenberg’s outlook for treasuries, it’s hard to argue with the broader points.

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