Prices are skyrocketing and Americans are not happy with it. Don’t worry, the Fed says
Americans aren’t happy with rising inflation and what it is costing them, but don’t worry, the Federal Reserve says.
OK, OK, now Fed officials admit, inflation is uncomfortably high and our previous forecasts were wrong.
However, the surge in prices this year is mainly the result of the reopening of the US economy and it will soon fade, they still insist as they have been doing for months.
See: MarketWatch Economic Calendar
This is the message the central bank repeated again last week even as the latest inflation readings showed another sharp rise in the cost of living. Consumer prices have jumped 5.4% in the past year to mark the strongest advance since 2008.
“It’s a shock going through the system associated with reopening the economy, and it has pushed inflation well above 2%,” Fed Chairman Jerome Powell said in the Senate Thursday. “And of course, we’re not comfortable with that.”
The Fed, which is supposed to keep inflation from escalating, has good reason to be uncomfortable.
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Just six months ago, the central bank expected inflation to rise 1.8% in 2021. Now the Fed is forecasting a 3.4% increase – and it could rise further.
Still, Powell and other Fed officials have good reason to believe that inflation will come down. Indeed, investors and professional economists also expect prices to stabilize.
The biggest problem in the economy right now is a classic mismatch between supply and demand.
Americans, flush with government stimulus funds and less worried about the coronavirus pandemic now that many are vaccinated, are spending money on just about everything: cars, homes, electronics, entertainment, vacation rentals, and more. .
Businesses, on the other hand, simply cannot provide everything consumers need. They cannot get enough supplies or hire enough workers to produce more goods and services. And that means there is too much money chasing too little commodity.
The result: higher prices for just about everything from labor to materials.
Lily: ‘Robust’ US economy is strengthening, Fed Beige Book says, but grapples with big shortages and higher inflation
However, these price increases simply cannot last. Take used vehicles.
The cost of used cars and trucks climbed 32% in the first six months of 2021. In contrast, prices fell an average of 0.6% per year from 2009 to 2019.
These large price fluctuations occurred to a lesser extent throughout the economy.
What the Fed expects is that the shortages will go away and the rise in prices will return to normal as broken global supply chains are assembled, pent-up consumer demand is satisfied, and most people go back to work.
So what is the problem ?
First, the cost of living is rising faster than wages and salaries for most households. It may be a short term problem, but it is still painful for millions of people.
The Americans have noticed it. A survey of consumer confidence fell to its lowest level in five months in July amid growing concerns about inflation. Middle- and low-income households with tighter budgets were particularly anxious.
“Given the reopening of the economy, one would expect households to be exuberant. Well that doesn’t appear to be the case, ”said Joel Naroff of Naroff Economics Advisors.
The broader danger, according to a small coterie of Fed critics, is that inflation could settle well above the central bank’s 2% target if consumers and businesses expect a fall. higher inflation.
If so, the Fed could be forced to raise interest rates faster and higher than expected, which could deal a blow to the economic recovery.
The central bank does not seem worried, however.
The Fed has already made it clear that it is ready to let prices rise by more than 2% for a while as part of its new medium inflation strategy. The Fed may even be okay with letting inflation rise from 2.5% to 3% for a while.
Asked by MarketWatch whether 2.5% to 3% inflation is too high, Chicago Federal Reserve Chairman Charles Evans said it would depend on how long it lasts.
Lily: Inflation will subside. Just be patient, says Evans of the Chicago Fed
His biggest worry is that inflation will eventually return to pre-crisis levels below 2%. Prices only rose an average of 1.8% per year in the decade leading up to the pandemic.
In other words, Evans believes the economy still faces a greater threat from low inflation than from high inflation.
“I think we could be facing a lot less inflation” in 2022 and 2023, Evans said, echoing the views of Powell and many others at the Fed in defending their easy money strategy.