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Mental Update #1
NFT's and Transitory Inflation
Our Latest Discussion | Seeking Signal in the Mud Space of Privilege, Credibility, and NFTs
In our latest episode, we discuss the muddied world of tribal thinking, the rise of financial zombies, meritocratic privilege, and how Da-Vinci predicted the value of NFT’s.
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Think Clearer | Transitory Inflation
On November 11, Jerome Powell, the current head of the Federal Reserve Banking testified that ''it was time to retire the term transitory when describing inflation."
Color the average American shocked.
While anyone shopping for groceries, buying Christmas presents, or filling up their gas tank knew this to be true, our economic czars needed time and data to be sure.
Apparently, 7 months of inflation running at 2x to 3x the target was enough to change their minds.
If price increases aren’t transitory, does that make them permanent? Was there ever an alternative scenario?
Yes, and probably not.
Let’s start by defining inflation.
As we discussed in our inflation deep dive, inflation commonly refers to a measure of price changes for a basket of goods. (fun fact- inflation used to refer to the expansion of the money supply, not prices. How times change...)
The Consumer Price Index (CPI) includes groceries, housing, clothing, transportation, and 4 other categories intended to capture the bulk of an average American’s expenditure.
The CPI has been used for decades to monitor inflation rates and is used by government agencies, such as Social Security, to benchmark payments (i.e. COLA adjustments).
Despite its institutional appeal, the basket remains a point of contention for those who believe it underestimates the real rate of inflation.
There are many people who believe that CPI, especially due to changes in that calculation over the past few decades, understates the true inflation rate in the United States. House prices, food prices, healthcare prices, and tuition prices are all rising faster than CPI, and they represent the bulk of middle-class household expenditure. Sometimes proponents of this idea are dismissed as “inflation truthers”, since they push back on expert numbers and assert that CPI is manipulated in favor of a narrative.
Lyn Alden, The Ultimate Guide to Inflation
Rarely do we see periods of a decline in inflation for the basket of goods.
Inflation rates - based on the objective of the central bank - tend to go up and stay up (they maintain a single-digit inflation target (~2%) even though it’s unclear they have the power to hit it).
Only in periods of severe economic contraction do the rates drop (after world wars, the great depression, the great recession, etc.). And these don’t reverse the decades-long trend prior to the drop.
It's mostly up only.
Does everything go up only?
Commodities, such as oil, can experience extreme fluctuations in price stability over time based on global supply and demand dynamics.
And technology innovation and productivity tend to decrease the cost of products in industries allowed to experiment (limited regulation, price flexibility, an incentive to innovate, etc.).
Unfortunately, there are few indications that carbon energy prices will decline as first-world governments focus on decarbonizing their economies (not to mention supply chain shocks).
And innovation takes times to mature.
All this leaves one wondering why Powell introduced transitory to just to retire it a short time later…
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