When the Consumer Price Index (CPI) began trending higher in earnest earlier this year, it was common for experts, market observers, and pundits to say that inflation would prove transitory.

While high inflation won’t be a permanent fixture, those in the transitory camp may currently be feeling some heat. Moreover, inflation is running hot around the world, catching central banks, such as the Federal Reserve, by surprise, since many were more concerned about deflation than rising consumer prices.

“Since the global financial crisis, the Fed has actually been more worried about deflation than inflation. Only 8% of monthly inflation readings were above the Fed’s 2% target,” says Nationwide’s Mark Hackett. “The more recent inflationary pressure has been largely due to supply chain disruptions and labor shortages, but increasingly commodity prices are contributing to the rise in prices. We see this in the S&P Goldman Sachs Commodity Index, which is now up 42% for the year and 10% over the past month.”

Adding to fears that inflation will prove more persistent and less transitory than previously hoped are high energy prices. Reflecting that, the energy sector is the best-performing group in the S&P 500 this year, and natural gas and gasoline prices have surged so rapidly that the White House is asking energy companies to get involved to lower costs.

The problem is that producers dialed back spending and cut rig counts during the 2020 oil bear market, and it takes time to restart those rigs. All that’s going on while supplies are tight and demand is sturdy.

“Recently, markets have paid significant attention to energy prices, with crude oil touching $80 per barrel for the first time since 1994,” notes Hackett. “Natural gas prices have exploded higher due to electricity demand in Europe, with domestic prices there nearing $6/MMBtu and panic buying driving local prices to over $50/MMBtu. Similar spikes have been seen in coal; with China struggling to meet electricity needs, coal prices touched $270/MT this week, nearly five times the pre-pandemic level.”

With high energy prices acting as a tax on those in lower wage brackets, stagflation concerns are rising, too.

“These factors are among the reasons why ‘stagflation’ is appearing more frequently in news articles and why he Atlanta Fed’s GDPNow model forecasts just 1.0% GDP growth in the 3rd Quarter. Investors continue to believe Fed Chair Powell’s contention that inflationary pressures are transitory, but the definition of ‘transitory’ seems to be changing in real-time,” concludes Hackett.

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