I don’t believe that inflation is transitory. Maybe I’m wrong. But an economy is a series of moving parts and transactions. Each transaction affects the other. Increased spending means more transactions and more economic growth. Decreased spending means fewer transactions and a shrinking of the economy – or recession.
Ever since the global financial crisis, quantitative easing has been used to increase spending and this has led to asset value increases. But there is now talk of tapering. This is a slowing in the rate at which a central bank would bring new assets onto its balance sheet under a quantitative easing policy.
Let’s assume this happens. There is less spending. The number of transactions shrink. The cost of capital goes up because the potential returns are decreased. Prices for services and products rise, inflation increases. This is all basic rationale so far. But now let’s consider the fact that supply chains have been skewered. Products and raw materials now have shortages and longer lead times. This leads to delays, decreased spending and decreased transactions. If households find their costs are going up or spending power decreasing, or both, then they’ll also contribute less to the economy. There is certainly lots to worry about.