Inflation is right here right now.
We'll see if its really is transitory, but personally I would not put all or even most of my eggs into that thesis bcause the downside if you are wrong and the inflation is secular will be huge.
https://www.wsj.com/articles/us-inflation-consumer-price-index-may-2021-11623288303
There's also a downside if the Fed freaks too soon and snuffs out inflation. Think about the price paid by Japan once disinflationary expectations set in during the early 1990s and couldn't be dislodged. They're wrapping up "lost decade" number 3 now, their national debt to GDP is a spectacle, and nobody can imagine a bright future. Remember, the US's demographics today are grayer than Japan's were in the early 1990's.
From May 2019 to May 2021, CPI has increased 5.2%, so the trend - spanning over the deflation of 2Q 2020 - is still historically low at only 2.6% inflation per year. I think we need a year >3% to have a chance at escaping Japanification and a debt trap. That is no sure thing, especially as wages are being traded for work-from-home privileges by the white-collar crowd.
Its important to step back and ask: is life really so terrible under a deflationary period?
Deflation is the natural tendency in a market economy with a sound money system as wages remain fixed but as productivity rises the unit cost of goods and services becomes cheaper so your wages gain purchasing power.
The standard of living in Japan has still risen despite their secular deflationary environment and the societal fabric has not become polarised by the huge disparity between the haves and have nots created by the asset inflation that has characterised developed Western economies.
Don't get me wrong, there are some serious problems with Japan's economy, but the pressure of keeping up with a continual rise in living costs is something many ordinary people would welcome.
Japan has only had technical deflation - a broad reduction in prices - for 13 of last 35 years. For the remaining time, they've usually had too-low sub-optimal inflation trending around the 0% to 2% range.
https://www.statista.com/statistics/270095/inflation-rate-in-japan/The reason most economists consider the 2-4% range optimal - if one's goals are economic growth and maximum employment - is because this is just enough inflation to stimulate people to spend or invest their money rather than sitting on it in a savings account or under a mattress. Meanwhile, inflation at these levels is too slow to create significant menu repricing costs or wage instability. In a zero-inflation economy (which due to normal fluctuations would regularly be a deflationary economy) there is much less incentive to put one's money to work in consumption or investment. This is especially true when you know that everyone else has an incentive to hoard their cash, so it is questionable whether you will sell anything in the market today or if your employer will have to lay you off due to a lack of demand.
Japan features an orderly culture, advanced technology, and developed-economy living standards, but beneath the surface it's not an economy you would want. The Japanese stock market has gone nowhere for a long time, and the bond market has yielded near-nothing for a long time. Thus, FIRE, or even regular retirement, has been an uphill battle, if not impossible for most Japanese. The Nikkei has only returned to life in the past couple of years as inflation started to go up in Japan - demonstrating how inflation goes hand in hand with economic growth.
Far worse for those of us with FIRE values...
Nearly one quarter of Japanese companies require employees to work more than 80 hours of overtime a month, according to a 2016 government survey. Those extra hours are often unpaid.
Source:
https://www.cnbc.com/2018/06/01/japan-has-some-of-the-longest-working-hours-in-the-world-its-trying-to-change.htmlAnd these are the
good jobs everyone aspires to get. As a result of workaholism, many Japanese people have no time to cultivate relationships, get married, or have kids. This, in turn, worsens Japan's demographic decline. Japan is certainly not like the U.S. or Europe during the Great Depression, when people lived off of one can of beans per day. But in a sense they are earning less value per hour in the sense that 70+ hour weeks are the norm so that one can afford an apartment the size of a cheap US hotel room. The facade of a strong economy is only supported by workaholism.
Even worse, a lack of inflation has allowed Japan's debt to outgrow its GDP. Imagine having a mortgage in such a country, where the payments are no easier to make a decade or two later than they were when the house was first bought. This is why double-digit savings rates are the norm. High savings rates keep inflation low, but good luck starting a business or earning enough from investments to support a 4% rule retirement.
This old Brookings Institution article from 1996 estimates
The costs of maintaining zero inflation would be a permanent reduction in gross domestic product of 1 to 3 percent and a permanent drop in employment by the same amount.
.