I have heard the word "transitory" more times in the past few weeks than I care to count. It has recently become one of the most uttered and analyzed terms in the field of economics. If I were selling ice cream, I would call it the flavor of the month.
My problem with this particular adjective is that many economists, high-level policymakers and politicians insist on using it repeatedly to describe the sharp increase in the rate of inflation in the U.S. this year. And just to be clear, I cannot say with any certainty that they are wrong. The current spate of higher-than-expected readings in the inflation data may ultimately prove to be merely transitory.
Nevertheless, these explanations have reached a level where the more I hear somebody using this word, the more it sounds to me like a sales pitch rather than a forecast. I am not yet alarmed, so I do not want to sound the alarm. But I cannot ignore the fact that we have never experienced an economic recovery like this one before. So while the folks at the microphones continue to project a posture of certitude, I prefer to stay wary.
I am not alone in my skepticism. Plastics processors have witnessed a wide variety of outcomes stemming from the onset of the pandemic and the subsequent recovery. Some have enjoyed surging demand while others have suffered sharp declines in business activity. But most all of them are facing the same two prevailing market forces at the moment: a sharp increase in materials prices and rising pressure on wages. And the plastics industry is not unique. These forces currently impact a wide swath of the entire U.S. economy.
There are a number of different ways to measure inflation, which, by the way, is a big part of the problem. The most commonly cited measure is the Consumer Price Index, or CPI, for short. For the 12 months ending in May, the core CPI escalated by about 4 percent. The data used to calculate the core CPI excludes changes in the prices of the volatile categories of food and energy products. There is no doubt a change in food prices can affect demand for certain plastics packaging products, so you may argue that food and energy should not be excluded. But most of the time, price changes for food and energy products are due primarily to transitory factors, so most analysts choose to focus on the so-called core data.
A 4 percent rate of inflation over the past year is not too bad, all things considered. But if you take a closer look at the numbers from April and May, you discover the slope of the line in the second quarter has increased to an annualized pace of just over 8 percent. In other words, the upward trend in the data is accelerating, and it is currently running at a pace much higher than anybody wants. Now it may slow down in the second half of the year … but there is also a chance it may speed up.