Transitory Inflation?

David R. Kotok
Thu Jun 3, 2021

Has the 10-year market-price-based estimate of the CPI peaked (May 12), and will it now decline?  

If inflation is peaking right now and starts to flatten its trajectory, then the inflation scare is transitory, and all the talking heads on TV have been spewing nonsense. Our view continues to be that we won’t know about transitory inflation until after September or October at the earliest. Before that, all is just guessing.  

An upward short-term price shock coming from a deep bottom with a wounded supply chain is an expected transitory shock. Spiking oil prices are a transitory shock. 

Our guess – and it is a guess – is that market-based prices are telling us that “transitory” is correct. Here’s why. 

The 5-year TIPS-based inflation forecast spiked higher than the 10-year. That means market agents were and still are pricing inflation as a short-term shock. It would be otherwise if 10-years were meaningfully higher than 5-years. But it isn’t, and so facts speak louder than talking heads dispensing opinions. We would reverse our opinion at once if the inflation break-even curve were steepening. But it is flattening.
Market-based prices deserve respect more than talking heads’ opinions, and that includes my own opinion. The market is giving us a transparent, real-money consensus view derived from the most informed and serious agents. They may not always be right, but Mr. Market has a decent track record.  

See the St. Louis Fed’s data on the 10-year breakeven inflation rate here:

And here is the data for the 5-year

Let’s see what autumn brings before we declare transitory a loser.  


David R. Kotok
Chairman of the Board & Chief Investment Officer
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