There is this ongoing debate whether the inflation we are seeing in various pockets is going to be transitory or not.
The communication from the Federal Reserve puts it across that they see inflation as transitory.
Then, a lot of market commentators are saying this is not.
In your daily lives, you may lean over to the camp that this is not transitory.
Inflation is kind of an important metric when it comes to planning for your future spending.
I think what is dangerous is the Fed’s definition of transitory.
Transitory means that what we are experiencing is temporary.
I think in a lot of our minds, temporary means that… things will return to where they were.
But that is not what they mean.
What they mean by transitory is that the high rate of inflation that we are experiencing will moderate to a normal rate of inflation.
My chicken rice cost me $4 a plate in Jan 2020.
Today, it cost me $5 a plate.
Our idea of temporary is that my plate of chicken rice will go back to $4 a plate after a while.
This is not how it works.
Their definition of transitory means that in the future, the plate of chicken rice will rise to $5.20. Less drastic, but still rising.
Inflation in the United States is often measured by the Personal Consumption Expenditure or PCE for short.
The chart above shows the 1-year rolling PCE inflation.
What you will observe is, other than the deflation periods we in the two different periods, inflation have been positive.
PCE can be rather scary.
- The average annual PCE is 6.51%
- The 25th percentile PCE is 4.62%
- The 75th percentile PCE is 8.33%
It just feels crazily high.
In the chart, we can see the transitory aspect was the abnormal low and high inflation we see recently. A return to normal would be to return to an annual range of 6.5 – 8.3%
Here is the growth of 1 dollar:
The impact to all of us from the financial planning is that transitory does not mean some sort of deflation, that returns our chicken rice to $4.
Inflation does not have to be the sort in the 1970s.
If we zoom in, the inflation is quite high.
But just a mere 1 year bump up of 10% inflation and returning to a normal 3% can dramatically affect your future spending power.
And that affects how you plan for your retirement.
But I think in reality, some stuff like high used car prices is transitory… they will come back to a lower price. Commodity foodstuff prices can be transitory.
But a lot of the things we buy tends not to be transitory. It sometimes means our salary will go down.
Do you want your salary to be reduced? Have you seen your work salary reduced? Seldom right?
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