It seems every year, market analysts come up with a new term to describe the economic scenario. In the 1970’s it was “stagflation” – a mixture of a stagnant economy and elevated inflation. In the 2000’s we had the economic “conundrum” --- a diversion in the relationship between lower interest rates and economic growth. Today, the word is “transitory.”
Ordinarily, when inflation rises, interest rates increase as well. After all, the cost of money should go up when inflation escalates. Well, inflation is certainly escalating right now, but rates have not risen, and the Federal Reserve’s Open Market Committee is not interested in raising short-term rates any time soon. Why? Because they feel this inflation is transitory.
We have never had an economy shut down over night. Now that it is opening, there are shortages all over the place. We have a housing shortage, a lumber shortage, a chip shortage and more. The Fed, as well as many market analysts, feel that once the economy opens, the shortages will ease and inflation will settle back down. Are they right? We will see. The employment report comes this week, and it will be interesting to see how labor fits into this picture. We are still down millions of jobs, but there seems to be labor shortages popping up in certain industries.