If there is one thing Economists understand very well, it’s mathematics. This is practically all they do, and all that means much to their discipline. If there’s one thing Economists don’t seem either competent with or interested in, it’s the economy. The math is supposed to match the other’s reality, yet rarely does.

There are times, however, when simple calculation is sufficient and (figuratively) on the money (literally, that is the whole other story).

Such was the case around 2011 and 2012. You might remember that period for exorbitant gasoline and food prices triggering FRBNY President Bill Dudley’s iPad debacle, or how restaurants began charging extra for extra napkins, of all things, as paper prices blew upward at a seemingly insane pace.

Both those things as well as other similar outcomes had led to the first of several inflation manias.

The inflation indices were howling, scorching hot according to nearly every Federal Reserve critic who had been “warning” that so much “money printing” could only come home to roost by robbing consumers of purchasing power. Ben Bernanke’s central bank policies – by then two massive QE’s – were sucking the remaining life out of the dollar and, they claimed, hoisting its carcass onto the economy in the form of grossly higher prices.

Bernanke and indeed many Economists took a more rational, appropriately mathematical approach. Understanding how these things work, certainly how they are measured, monetary officials here and elsewhere were suddenly resolute. Prices had gone up, sure, commodities most of all, though when compared to very low prices such as those produced during any deflationary period like the Great “Recession” the rebound from it would naturally come out sizable.

Base effects.

In early 2011, Chairman Bernanke, the guy whose reputation was riding on QE producing inflation, instead told everyone to take a step back and chill.

On the inflation front, we have recently seen significant increases in some highly visible prices, notably for gasoline. Indeed, prices of many commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply. Nevertheless, overall inflation remains quite low.

A more subdued trend in prices, Bernanke said, is “not surprising given the substantial slack in the economy.”

Beyond those idiosyncrasies, there was no reason to believe that consumer prices would continue to rise at the rates given from the simple arithmetic of base effects. By April 2011, though the PPI (finished goods) was up 7% year-over-year in that month, a second base effect (below), as Bernanke said earlier in February there remained too much economic ground to cover for it to keep up.

He even used the word transitory in a speech later the same year, in September:

However, inflation is expected to moderate in the coming quarters as these transitory influences wane. In particular, the prices of oil and many other commodities have either leveled off or have come down from their highs.

And that is just what happened. Unlike many others – every other? – in the QE-is-money-printing camp, the Federal Reserve position was grounded by the facts. Consumer and producer prices were rebounding, but that alone didn’t nor wouldn’t settle the matter; rebounds unlike recovery – therefore true inflationary periods – don’t come so easily.

Now where he and Economists went wrong was in how they expected as the economy began to actually recover (remember, they came to believe recovery was being delayed), that’s when inflation pressures would lead to a more sustainable trend in consumer prices which would represented something other than base comparison mathematics.

In 2011, he really should have taken a harder look at exactly why oil and commodities had “leveled off or have come down from their highs.” Instead, never figuring out the whole false dawn mechanics (eurodollars), by 2015 his successor Janet Yellen started using “transitory” for the opposite way and got it all wrong (the disinflationary pressures which kept holding inflation down proved way beyond temporary).

Base effects are, by definition, transitory while any initial price rebound immediately following a deflationary burst (such as either 2009 or 2020), the very definition of reflation, will end up the same way – unless there’s more going on in the economy than those things.

There wasn’t following the Great “Recession” even if for reasons that officials are only recently beginning to explore in useful depth.

Slack is back in 2021, in big way, only nowadays it’s given a more reasonable interpretation (because this time they can blame COVID). Therefore, even Jay Powell is adopting the word transitory, too, except in this case he’s using the original Bernanke version (correctly) rather than the confused vocabulary of Yellen.

From last month:

If we do see what we believe is likely a transitory increase in inflation, where longer-term inflation expectations are broadly stable, I expect that we will be patient.

And that’s exactly what’s been shaping up even as the hysteria in the media, and among the same Fed critics, ramps up to eleven yet again. With PPI data in the US released today, and the finished goods index up a “scorching” 5.98%, the highest in a decade going all the way back to Bernanke’s September 2011 speech, the headlines blare INFLATION while market-based inflation indications shrug.

Base effects contributed much to the rate, as did commodity prices. It really is no different than the initial rebound (Reflation #1) following the Great “Recession.” And next month it will be worse; meaning the rates will be even higher given that they’ll compare to the ultimate lows set during April 2020, and so the rhetoric will certainly surpass them more than they already have for this month’s figures.

Like 2011 heading toward a very troubled 2012, the entire inflation case rests upon what comes next – real inflation is, after all, a sustained trend in consumer prices (and there’s no evidence yet producer prices are grossly distorting them). Even during this year’s reflationary bond sell-off from January to late February, it really wasn’t much of a shift in expectations, certainly nowhere near the hysterically described “historic” rout. In fact, the latest move in it is but a speck when compared to the one Bernanke got (partly) right.

Why is this one so underwhelming in every possible way?

Highest-in-a-decade PPI, blowout payrolls for the same month of March 2021, vaccines, a potential end to the pandemic and the responding governmental overreach, trillions upon trillions, WWII-style fiscal wreckage, all the QE and bank reserves anyone could imagine – and yet, hardly much. Even today, inflation expectations (TIPS breakevens) were down on the day and nominal UST’s were up no more than a market fluctuation.


The key to inflation actually isn’t even contained in the TIPS breakevens; no, a better place to look is real yields which get set based on perceptions of gross economic shortfalls and the like, and they continue to be nowhere near recovery from recovered slack.

Because when even the central bankers are saying “hey, hold on a minute”, that’s saying something. Far be it for me to grow comfortable agreeing with them, I can do the reflation math, too. As I’ve said before, as easy as it might be otherwise, let’s not get carried away here. For one thing, the whole bond market sure isn’t.