Inflation: permanent or transitory?

Will rising inflation persist or prove temporary? Our experts weigh in on both scenarios.

As in-person education resumes for students this fall, tuition costs, especially for higher education, are top of mind for many parents and grandparents. Although college tuition rose at a historically low rate for the 2020-2021 academic year,1 those hoping for a reduction in college costs going forward may be disappointed. Small increases or freezes may be more common for the remainder of this school year and next.2 One reason is something you may have heard a lot about in recent months: inflation.

Inflation rose at the fastest pace in more than a decade this spring

Rising prices at the gas pump, grocery store and for raw materials used in manufacturing have been hard to ignore in recent months. Prices for big ticket items, from furniture and appliances to airfare and new and used vehicles also began to rise as the economic recovery picked up steam this spring. In fact, the U.S. Bureau of Labor Statistics reported that the Consumer Prices Index accelerated in April and May at the fastest pace since 2008, rising 4.2% and 5.4%, respectively.3

CPI is a measure of the average change over time in the prices paid by consumers for a broad range of goods and services. It is used to help measure price movements within specific categories, such as college tuition and fixed fees, which account for 1.5% of CPI. (The broader education category, a component of the tuition, other school fees, and childcare index, represents 3% of CPI.)

Should you be worried?

Whether you're facing higher tuition bills or paying more at the pump, a rise in inflation can be concerning—especially for those in or nearing retirement. It means you will have to spend more money for the same things. However, inflation itself is not inherently bad.

According to John J. Canally, Jr., CFA, IMG Chief Portfolio Strategist, following a recession, inflation is a positive sign that the economy is recovering, and demand is picking up. It only becomes worrisome when the inflation level continues to rise beyond the Fed's target rate.

The Federal Reserve's (the Fed's) preferred measure of inflation, which excludes the more volatile food and energy sectors—has risen at just 1.8% over the past 30 years, well below the Fed's target of 2%. In the prior 30 years, from 1961 to 1991, inflation averaged 4.6%.

Canally says that while news about ships stuck in the Suez Canal or a shortage of chicken wings during the Super Bowl tend to garner a lot of media attention, investors should avoid getting caught up in the hype.

"Price hikes and dips are routine in a free-market economy," he said. "However, when inflation is so low for an extended period of time, like we've experienced in recent years, it doesn’t garner as much attention."

Why It's Different This Time

Whether inflation will persist at elevated levels or prove to be transitory remains a question for investors, consumers and the markets. Canally weighs the case for both scenarios below.

The case for permanently higher inflation

While consumer expectations have remained low and stable, as the chart below indicates, they began to tick up during the second quarter of this year.

Inflation expectations remain well contained

Financial data

Source: FactSet financial data and analytics | Data through June 2021

Factors that could drive higher inflation for a longer period of time include a continuing surge in the cost of raw materials, ongoing supply chain disruptions and escalations in trade protectionism. As we saw earlier this year, these conditions led to higher prices and a decrease in global trade. Demographic shifts, immigration and a lack of research and development (R&D) also contribute by slowing productivity.

Permanent changes in the labor market, driven by the Great Covid Evolution, may also contribute to keeping inflation elevated for a potentially longer period. These include rising wages to accommodate worker demand, fewer available workers, and more people taking early retirement. Higher wages and labor shortages tend to drive up prices as businesses struggle to meet demand. Higher wages can also mean less money available for business reinvestment to accommodate research and development, operational efficiencies, and solve logistical challenges, among others. These factors tend to place upward pressure on inflation.

"While the markets and the Fed are concerned about a persistent rise in core inflation, following years of calm, it's not likely that we will see a return to the higher inflation profile of the 1970s and 80s," Canally said.

The case for transitory inflation

It's important to keep in mind that the circumstances experienced during the pandemic have been unique. Canally points out that even during World War II, the U.S. economy never shut down to the extent it did in 2020. As a result, glitches and disruptions are expected as workers are recalled and production, manufacturing and distribution come back online and ramp up to previous levels.

In the meantime, supply chain shortages have temporarily driven up prices for certain goods. For example, new car inventory was extremely tight in the spring and summer. That pushed used-car prices to their highest level on record, with the average price of a previously owned vehicle surging to $25,000 in June, up 25% from the previous year.4

Canally believes that the sharp rise in the cost of raw materials is also a result of the unique circumstances resulting from the pandemic-driven global economic shutdowns.

"While prices for raw materials and labor (wages) tend to rise in the early phase of a new business cycle, there are already some signs that the supply chain issues are abating, and prices of many raw materials are dropping as we move into the mid-cycle of the economic recovery," he said. "We'd need to see sustained higher wages in order for the current run up in raw materials to stick."

As a result, he sees more factors pushing down on inflation than pushing up: Inflation expectations on the part of consumers, the Fed and market analysts remain low, R&D-led productivity is rising again, and one of the market’s key gauges of future inflation, the 10 to 30-year Treasury spread, has signaled that the markets are not worried.

Relationship between interest rates and inflation

Financial data

Source: FactSet financial data and analytics | Data through June 2021

"While inflation may run higher than in the past 30 years, it is not likely to surge like we saw in the 1970s and early 1980s," Canally said.

Instead, he believes inflation will remain closer to the Fed's target, in the 2% to 3% range, which is enough to give businesses pricing power, while leaving room to increase wages for some workers, especially those in lower-paying sectors, such as retail, restaurants and travel.

What Does This Mean for Your Lifetime Income?

While IMG believes the recent spike in inflation will be temporary and give way to a more sustainable range over the next few years, it remains one of many factors challenging traditional methods for generating income in retirement. Others include market volatility and the potential for rising interest rates and taxes. However, there are steps you can take now to help protect your income, whether you're retired or nearing retirement.

A reliable income stream that is insulated against market swings, as well as rising inflation, interest rates and taxes, can not only help you meet the full range of your retirement goals but provide income you can't outlive.

If you haven't started taking Social Security, consider how long you can delay claiming benefits. Each year you delay, between ages 62 and 70, the amount you are eligible to receive grows by about 8% each year, which is significantly higher than current interest rates. After age 70, there is no longer an incentive to wait.

If you need immediate income, think about annuitizing a portion of your retirement assets. A fixed annuity can supplement other guaranteed income sources, such as a pension or Social Security, to provide a reliable income floor to pay for essential expenses, such as housing, food, clothing, healthcare and transportation. Fixed annuities aren't impacted by the ups and downs of the financial markets. You receive the same amount every month, regardless of what the stock market is doing. That helps to "market proof" your retirement with guaranteed growth during the accumulation phase, and guaranteed income during retirement.5

Variable annuities, on the other hand, are designed to help capture market gains, which can help you keep pace with inflation. While they can play a role as part of a diversified income stream in retirement, they are generally not recommended as part of an income floor. Since returns will rise and fall with the market, variable annuities won't provide a guaranteed amount of income.

Determining how inflation may impact your income over time is another reason to meet with your TIAA advisor on a regular basis. While no one can predict the future, your advisor can help you structure a lifetime income, based on your individual needs, wants and goals.

Discover More

Financial Planning

Perspectives for uncertain times

Get insights from TIAA experts.


3 tips to help you plan for healthcare in retirement

As healthcare costs continue to rise, learn ways to save and prepare.

Take Action

Call us

We're here to answer your questions and guide you towards the right solution.​


Weekdays, 8 A.M. to 10 P.M. (ET)

Schedule an appointment​

You can schedule a time convenient for you to meet with a financial professional.​

Read more in Perspectives​

Get financial and investment insights from TIAA experts​.

1 in a new window

2 in a new window

3; in a new window

4 in a new window

5Guarantees are based on the claims-paying ability of the issuer.

This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.