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Jerome Powell.
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  • Core PCE (personal consumption expenditures), rose to 3.5% in the first quarter, marking its second-fastest pace of growth since 2011.
  • Fed chair Jerome Powell says inflation is "transitory" and will pass once economic activity normalizes.
  • We asked three experts if they stand with Powell or believe inflation might be a bigger issue.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

On April 29, new data showed that a key measure of inflation monitored by the Fed – core PCE (personal consumption expenditures) – rose to 3.5% from 1.7% in the first quarter, marking its second-fastest pace of growth since 2011.

Then, on May 12, the Bureau of Labor Statistics released new Consumer Price Index (CPI) data that revealed a 4.2% rise in the all price index before seasonal adjustment.

The data confirmed what many market commentators had been suggesting for some time: inflation is rising. The big question is now whether this inflationary period is "transitory" as the Federal Reserve claims, or if it is here to stay.

There are experts on both sides of the argument with strong cases.

Mohamed El-Erian, the chief economic advisor at Allianz and president of Queen's College, Cambridge, said in an interview with CNBC at the beginning of May that he believes inflation isn't transitory as the Fed has claimed. He pointed to rising commodity prices, comments from Warren Buffett on pricing, and rising CPI and core PCE figures as evidence for his claim.

On the other hand, Beth Ann Bovino, a chief economist for S&P Global Economics, wrote in a recent report that she believes the recent jump in inflation will be transitory.

Bovino said inflation is tied to a "base effect" from pandemic-depressed prices in 2020 and a near-term boost in prices from supply and labor bottlenecks.

With these contrasting opinions in mind, Insider reached out to a few experts to give a more complete picture of the arguments for and against "transitory" inflation.

Here's what they had to say.

Gautam Khanna, senior portfolio manager at Insight Investment, which has $1.03 trillion in assets under management

"We agree with the Fed's view that the current wave of inflation will be high in the near-term but ultimately transitory. It is a function of base effects (the CPI figure is being compared to a year ago – during the height of lockdowns), pent up demand and supply chain friction."

Guatam Khanna told Insider that we are in a "deflationary regime" dominated by three primary drivers: aging demographics, technological innovation, and global trade.

According to Khanna, we will see inflation for anywhere from the next two to 18 months, but after that, deflationary pressures will return things to normal.

Khanna expects periods of volatility and potential opportunities to "buy the dips" during this period.

The senior portfolio manager said that he doesn't see government bond yields moving higher amid inflationary pressures, but noted that "fiscal and monetary expansion currently underway both pose a credible challenge to this thesis."

"It's likely that the longer-term secular trends which have been keeping inflation and productivity low will begin to re-establish themselves," Khanna said.

"Remember our unemployment rate prior to COVID in the U.S. was 3.5% (below estimates of the 'natural' rate), the economy was growing, and yet we were still struggling to achieve the Fed's 2% average inflation target. Nothing has fundamentally changed since the pandemic," he added.

Read more: Bank of America says Wall Street stock pickers remain vulnerable to an inflation shock – and recommends 2 trades for protection as prices rise

Dr. Wayne Winegarden, senior fellow in business and economics at the Pacific Research Institute

"There is a growing risk of prolonged inflationary pressures. The Federal Reserve has an untested way of managing the money supply, and I am not confident that they will be able to control the inflationary pressures that they have created with all of their recent actions.

"Add to this problem the intentions expressed by the Fed policymakers that they will not be acting anytime soon, and it is a recipe for strong inflationary pressures and rising interest rates later on in 2021 and into 2022."

Dr. Wayne Winegarden said that he fears the Fed is "behind the curve" when it comes to addressing inflation.

Winegarden noted that the Fed's new monetary policies, including so-called quantitative easing (QE), have never been tested. He also questioned whether Fed Chair Jerome Powell may be overconfident or even "arrogant" in his view that inflation can easily be controlled.

This echoes comments made by El-Erian, who said the Fed needed to have more "humility" in its approach to these issues.

Winegarden added that he believes the Fed should be considering ending quantitative easing policies, but instead, they have said they are only thinking about beginning to discuss that move.

The senior fellow at the Pacific Research Institute also noted that the Fed continues to look backwards at economic data instead of anticipating changes and listening to experts who are seeing inflation on the ground level.

"That's what concerns me the most. You are seeing it (inflation) in the CPI, you're seeing it in lumber and other commodity prices, you're seeing it in home prices, so anywhere you look, you see the problem," Winegarden said.

"We've had a quadrupling of the Fed balance sheet, the ability to control inflation in that type of environment is, I think, incredibly difficult, and that's what keeps me up at night," he added.

Winegarden concluded by saying that there could be a run-up of inflation during the second half of the year that forces the Fed's hand to taper asset purchases and increase interest rates.

Eric Leve, chief investment officer at Bailard, a San Francisco-area wealth and investment management firm

"The current bout of inflation will likely prove short-lived. Inflation is usually the result of utilizing the economy's resources beyond their capacity, thereby needing to bid up the price of those last available resources (labor, machinery, commodities). This is certainly not the case now. Capacity utilization in the U.S. stands at 74.9%, still far below the 76.9% level pre-COVID."

Eric Leve told Insider that he believes inflation will be short-lived. Leve pointed out that the CPI report, which came out on May 12, showed "pressures were in items whose prices fluctuate quickly and not in those that tend to become entrenched inflation."

Leve said rising costs can mostly be explained by the rapid reopening.

"It is natural for commodity prices to rise, even rise sharply, early in an economic expansion. It is probably a good thing: rising commodity prices at this point in an economic cycle are usually a signal that an economy is gaining traction and less often one that inflation is on the horizon," Leve said.

The chief investment officer at Bailard noted that the US economy has never experienced "hyperinflation" and said it was unlikely to happen during this recovery. However, Leve added that hyperinflation could be seen in emerging markets nations like Turkey or Argentina due to monetary easing from US authorities.

Leve pointed out that the last periods of significant inflation in the US (1973, 1979) weren't caused by monetary policy or above-average economic growth, but rather supply shocks, primarily in oil.

Leve said his "greatest concern is that the fastest real economic growth in thirty years is accompanied by huge fiscal stimulus from the federal government and record-breaking 'excess savings' that consumers built up over a year of sheltering in place. These three sources of demand could strain our economy's ability to produce goods, leading to inflation."

"The most likely nature of this inflation though is transitory: once factories and workers are again supplying what hungry consumers are seeking, the headline inflation we are currently seeing should subside," Leve concluded.

Read the original article on Business Insider