Is Inflation Still “Transitory”?

September CPI inflation grew 5.39% year-over-year, an uptick from the prior month. Fed officials are somewhat walking back their claims it is “transitory,” so market-based expectations for rate hikes have now moved lift-off forward to December 2022. We don’t believe the inflation is monetary in origin, so it would be an error to tighten policy to address it. If it were monetary, it would be more broad-based. It is, instead, explainable by outsize price gains in just two categories. It is unlikely that ongoing shortages could cause a repeat of last year’s highly unusual price gains; indeed, shortages reduce the number of units consumers can buy. We are not worried about owners' equivalent rent sustaining inflation when high home prices translate into rental contracts. Even if OER returns to its peak levels of the housing bubble era, it would contribute only modestly more to CPI than it is now. Market and survey-based inflation expectations remain contained.