WASHINGTON–A word not heard much in recent years continues to get more attention: “inflation,” with everyone from Fed officials to analysts to CU ALM committees to Google searchers involved in the debate.
Inflation’s effects on consumer prices and up and down the supply chain, and whether the Fed will have to act earlier than expected to raise rates—pushing up rates overall—is being discussed more frequently as the economy recovers from the coronavirus pandemic.
“Interest in inflation has jumped this year for both political and practical reasons. Republicans, and even some Democrats, have been warning that the government’s hefty pandemic spending could push inflation higher,” the New York Times reported. “And as the economy gains steam, demand is coming back faster than supply. It’s a recipe for bigger price tags for everything from airline tickets to used cars, at least temporarily.”
As the Times noted and CUToday.info has previously reported, the Federal Reserve believes the latest jump in prices is temporary, as “data quirks, supply bottlenecks and a reopening-induced pop in demand work their way through the system. For now, officials see no reason to tap the brakes by slowing down large-scale bond purchases or raising interest rates, policy changes that would slacken demand as an antidote to accelerating inflation.”
Avoiding an Overreaction
The Fed further noted the Fed also has big reasons to avoid overreacting.
“The problem in the wake of the 2007 to 2009 recession was tepid price gains that risked an economically damaging downward spiral, not fast ones,” the analysis observed. “Inflation far above the central bank’s comfort level hasn’t been a feature of the economic landscape since the 1980s.”
But prices have stayed in control for so long partly because of muted inflation expectations — a critical factor in the Fed’s current approach. And yet prices for many items have been on the increase in 2021.
“One of the main tools the Fed has to control inflation and inflation expectations is — it has the ability to cause a recession,” Jason Furman, an economist at Harvard and former top Obama administration economic official, told the Times. “That’s not entirely comforting.”
Sign ‘Plan is Working’
The Times noted some Fed officials — like Charles Evans, president of the Federal Reserve Bank of Chicago — have said they’re happy to see inflation expectations rising, taking it as a sign that the plan is working. Others have played down the risk that inflation expectations will jump too high before the economy fully heals.
“It seems unlikely, frankly, that we would see inflation moving up in a persistent way that would actually move inflation expectations up, while there was still significant slack in the labor market,” Jerome H. Powell, the Fed chair, said during an April 28 news conference.
But discussion continues to grow. The Times reported Fox Business is airing segments that discuss inflation this month at five times its normal rate, according to data from the Gdelt Project. On Fox News Channel, mentions of inflation have surged to six times the normal rate.
Increased Google Searches
“Google searches for “inflation” have taken off, Twitter inflation hashtags have increased, and monthly price data reports have newly become front-page headlines,” the report added.
Most recently, as CUToday.info reported, Consumer Price Inflation surprised economists by rocketing higher in April, data released last week showed, rising by 4.2%.
Ultimately, “things will most likely work out, economists have predicted,” the Times’ analysis concluded. “The demand boom anticipated in 2021 is unlikely to last, because consumers’ pandemic savings will eventually be exhausted. Supply issues should be resolved, though it is not clear when. Many analysts expect prices to moderate over the next year or so.”