What Is Transitory Inflation? The Economic Impact

Inflation in newspapers.
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As prices continue to increase, the word “inflation” is making news headlines, but what does it mean? Inflation, by definition, means that money buys less than it did previously. When inflation occurs in any economy, products and services are more expensive. Financial experts can usually compare the cost of products and services now to a previous point in time to offer an inflation percentage.

What Is Transitory Inflation?

Inflation is transitory when experts expect that it won’t last. Inflation often rises and then levels out or rises slowly over a long period of time. There are a few different patterns of transitory inflation.

  1. A sharp, temporary increase in prices followed by a dip
  2. An increase in prices followed by a plateau
  3. A quick increase in prices, after which prices continue rising but more slowly

Is Our Economy Experiencing Transitory Inflation?

As prices increase, consumers look to the federal government for guidance on the state of the economy and predictions about the future. The Federal Reserve and other financial experts estimate that America’s current inflation may increase more than is normal over the remainder of the year. By definition, we are currently experiencing transitory inflation. Still, many wonder how high will prices go, and how long the inflation will last — some experts doubt whether the current inflation trend is truly transitory or if inflation will continue to increase.

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What Causes Transitory Inflation?

At a basic level, inflation is all about supply and demand. When demand is up, prices may increase. When supply is up, prices may stabilize or decrease. The COVID-19 pandemic led to a low supply of many products and services as businesses closed down.

Our current economy has been hit twice. The first time was with the decrease in product and service availability. Lower supply meant that manufacturers had an opportunity to increase prices. At the same time, demand rose when government stimulus checks flooded the economy. Consumers had more money to spend than before, increasing demand. However, both the supply-side issues and the demand-side issues are temporary. Businesses are opening back up, increasing the availability of goods and services, and government funds are running out, decreasing buying power.

Impacts of Transitory Inflation

Transitory inflation extends beyond grocery stores and gas prices. The prices for many products have increased, including building supplies and home prices. More people are looking to buy homes with fewer available on the market, meaning people who might otherwise be looking to purchase a home are instead continuing to rent. Wages have also increased.

What to Expect in a Transitory Inflation Period

Labor costs will remain high until a recession period in the economy. This means that products relying heavily on labor may maintain high costs. New homes are a great example of this — more expensive materials and a higher cost of labor result in newly-built homes costing more.

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The cost of buying existing homes and renting may also stay high. As labor workers earn more money, they have more money to spend, which contributes to high demand. That doesn’t mean home prices will continue to rise, but they may not fall back down any time soon.

Takeaway

A transitory inflation period is temporary — but how temporary is uncertain. It is likely that COVID-19’s impact on the economy will be relatively short term. Prices may not go back down to what they once were, but, eventually, wages and prices should level out.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

About the Author

Katy Hebebrand is a freelance writer with eight years of experience in the financial industry. She earned her BA from the University of West Florida and her MA from Full Sail University. Since beginning to work full-time as a freelance writer three years ago, she has written on topics spanning many fields, including home building, families and parenting, legal and professional/corporate communications.

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