The Myth of ‘Transitory’ Inflation

During 2021 and 2022, central banks and policymakers frequently used the term "transitory inflation" to reassure the public that price rises were temporary. However, inflation proved to be longer-lasting and more persistent than expected.

Was this a failure of economic forecasting, or was "transitory" always a misleading term? In this article, we examine why the inflation narrative was flawed and what investors should learn from it.

Why Policymakers Got It Wrong

1. Underestimating Supply Chain Disruptions

• The COVID-19 pandemic caused major supply chain breakdowns, particularly in global manufacturing and shipping.
• Inflation lasted longer than expected because supply chains took years to recover.

2. Ignoring the Labour Market Shift

• Wage inflation accelerated as workers demanded higher pay in response to rising living costs.
• Labour shortages, particularly in sectors like transportation and healthcare, pushed prices even higher.

3. Government Stimulus and Excess Liquidity

• Massive fiscal stimulus during the pandemic flooded economies with cash, increasing demand.
• Cheap borrowing rates encouraged spending, further fueling inflation.

4. The Psychological Effect of Inflation

• Once inflation became embedded in consumer expectations, it was no longer “transitory.”
• Businesses raised prices preemptively, and workers demanded higher wages, creating a self-reinforcing cycle.