© Reuters. File photo: The Federal Reserve Building was taken on August 22, 2018 in Washington, DC, USA. REUTERS / Chris Wattie / File photo
Howard Schneider
WASHINGTON (Reuters)-Federal Reserve Chairman Jerome Powell explained in a high-profile speech in August why the current high inflation in the United States will be “temporary” and moderate this year. . time.
New data released on Friday showed that there is no conclusion. In September, the annual rate of the personal consumption expenditure price index rose to 4.4% from 4.2% in August, and inflation continued to an unprecedented level in 30 years.
After excluding food and energy costs, the index rose at an annual rate of 3.6% in September, matching the increase in the previous three months, indicating that even if some items with the lowest prices and high volatility were excluded, prices continued to rise.
Powell believes that labor costs that need to be closely monitored grew at the highest rate since 2001 in the third quarter.
The U.S. Central Bank will meet next week to update its views on the economy and monetary policy, as officials balance their hopes of supporting the economy with the lowest possible interest rates and concerns about rising inflation too quickly.
Here is how the story of inflation has evolved:
Higher prices are coming
Fed officials knew at the beginning of the year that inflation will rise as the global economy rebounds from the coronavirus pandemic. However, when some economists believe that record federal spending levels will cause prices to continue to rise, most Fed officials expect a brief episode that was initially driven by simple calculations—the “base effect” of the weak economy returning to normal— And the inevitable shock of reopening.
At the policy meeting on March 16-17, Fed officials marked their inflation outlook for 2021. Powell said at a press conference after the release of the policy statement and economic forecast that these “relatively moderate inflation growth…one-off inflation… There was a time when inflation was rising, and it was Ascend. And that time was not now.”
However, inflation in September was twice the Fed’s 2% target, and the authorities’ forecasts have also increased.
(Graphic: Fed inflation outlook-https://graphics.reuters.com/USA-FED/INFLATION/gkvlgxyqnpb/chart.png)
Powell’s own language has changed. He told reporters after the end of the central bank’s policy meeting from September 21 to 22: “As the reopening continues, bottlenecks, recruitment difficulties and other constraints may once again prove to be larger and longer-lasting than expected, posing an upward risk to inflation. .”.
(Graphic: Soaring COVID Inflation-https://graphics.reuters.com/USA-FED/INFLATION/akvezawxopr/chart.png)
Some policymakers have set the end of the year as the time when inflation slows, otherwise they will worry that they are wrong.
Powell and many others still believe it will happen, but it took longer than expected, and the September data showed little signs of expected slowdown.
Generally increased?
Powell said in his August speech: “So far, the surge in inflation has been mainly the product of a small number of goods and services that have been directly affected by the pandemic and economic reopening.”
He cited the fact that alternative inflationary measures that eliminate the strongest impact on prices are still being suppressed. But since his speech, these measures have increased, reflecting broader price increases.
(Graphic: General Inflation-https://graphics.reuters.com/USA-FED/INFLATION/klpykzrowpg/chart.png)
Reduce the impact of outliers
Powell said that policymakers “are also directly monitoring the prices of specific goods and services most affected by the pandemic and the reopening, and in some cases they are beginning to ease.”
Powell cited the famous example of used cars. Second-hand car prices hit a record high in the summer and even slowed down. But he also mentioned that the overall price increase of durable goods is expected to slow down, and with some measures, this has not happened yet. Durable goods inflation rose 7.3% year-on-year in September, compared with 7% in August.
(Graphic: Top pressure?-https://graphics.reuters.com/USA-FED/INFLATION/klvykzrrwvg/chart.png)
salary
Powell said in August: “Today, we hardly see any signs of wage growth that may threaten excessive inflation.” “We will continue to monitor this matter closely.”
In the three months ending in September, salary costs rose by 1.3%, the largest increase since 2001. The Fed needs to assess whether the adjustment of labor supply and demand will affect the end of the year or whether it has just begun. The salary cost of the food and accommodation industry in the hard-hit areas increased by more than 7% year-on-year.
(Graphic: Salary costs and benefits-https://graphics.reuters.com/USA-FED/INFLATION/zdvxorebnpx/chart.png)
expect
“The change in long-term inflation expectations is much smaller than actual inflation or short-term expectations, which shows that households, businesses and market participants also believe that the current high inflation data may only be temporary,” Powell said. Arguments can be made. The Fed pays more attention to expectations than inflation itself, although their measurement criteria are uncertain. They have drifted higher, and if this situation continues, it will be particularly worrying.
(Graph: Rising inflation expectations-https://graphics.reuters.com/USA-FED/INFLATION/gdvzywakwpw/chart.png)
“Global Deflation Factors”
Perhaps the most pious aspect of Powell’s August speech was his mention of the global impact of technology, demographics, and mobile global supply chains on anchoring prices.
(Graphic: Global Deflation-https://graphics.reuters.com/USA-FED/INFLATION/xmvjolddxpr/chart.png)
“Although the underlying global deflationary factors may change over time, there is no reason to believe that they will suddenly reverse or subside,” Powell said. “As the pandemic subsides, they seem more likely to continue to put pressure on inflation. The truth will depend on developments outside the control of the Federal Reserve, from global capital flowing into China (for example, as the rule of Chinese leader Xi Jinping evolves ), to the impact of climate change mitigation efforts, climate change is still in its infancy.