Will US inflation indeed be transient?
The debacle is a pandemic  akin to a natural disaster; not a financial challenge  High indebtedness; weaker employment etc that ravaged the economic climate in the earlier instances when economic crisis has struck  Savings are way higher in the US now; twice of pre-pandemic levels; four times the rate of 2009; the propensity to spend will emerge once vaccinations increase and people start spending; The inflation levels might see the impact of this surge through the western summers  Lower household debt burden: Delinquent share of outstanding debt dropped to 3.1% in the first quarter of 2021, the lowest since records began in 1999 according to the Federal Reserve Bank of New York and Equifax. That share compares with 5% at the end of the 2001 recession and 11.1% in 2009  While labour shortage owing to fear of the pandemic has not only kept Participation rates low, it has forced an increased in wages; There is a distinct possibility that re emergence of confidence through vaccination will increase the LPR  Home prices are 14% higher compared with Fed 2020. Lumber prices have skyrocketed over 6 times from their lows in Apr 20 till May. Close to 40% correction in the last month will still ensure that the prices remain way higher than ever in the past, well supported by the extreme strong real estate demand  The world is facing the impact of a far lower investment in the energy and mining sectors (a drop of 40% since 2011), leading to the current state where supply is unable to keep up with the demand ( Schroeders)  Through the pandemic, businesses have absorbed the higher raw material prices, impacting their margins; It has to sooner than later flow in to consumer prices  The China angle: Chinese demand for various commodities (natural gas for one) having pushed commodity prices across the board, there are evidences that China has begun to export inflation. Imports into the US are seeing this. To answer this question, which has seen reasonably divergent responses, one needs to have a closer look into the potential contributing factors.The factors of chip shortages, copper/lumber shortages, shortage of labour, clearly point to a classic supply shortage led to price inflation. At the same time, for a world potentially reemerging from a crisis, we are witnessing relatively far stronger financial health conditions - healthy savings, lower household indebtedness, better health of financial intermediaries ( banks), very large dosages ( arguably excess in some cases) of fiscal and monetary support.Thus, expectations for a sharp rebound in the economy following confident levels of vaccinations look to be well in place. This will be further supported by a huge wallet of unspent savings that will get opened up.Thus, a demand-led wage-price spiral with the unabating factors contributing to persistent supply shortages will pose a severe upside risk to Inflation. The hope that inflation will remain transient will just remain just that -- a hope. (Lakshmanan V is the Head of Treasury at Federal Bank. Views are his own)