U.S. Federal Reserve officials now believe the “temporary” surge in inflation may last longer than they originally expected as prices rise in the wake of the reopening of the economy.
Headline price inflation was up 5% year over year in May and the Dow Jones estimate for a 3.4% gain in the Fed’s preferred inflation gauge, which will be released on Friday, would, if correct, be the highest reading since April 1992.
The Fed has set a goal of 2% inflation for the core personal consumption expenditures price index.
Fed Chair Jerome Powell told a U.S. congressional committee on Tuesday that the recent high inflation readings resulted from a “perfect storm” of circumstances related to the reopening, and would abate.
He cited airline tickets, hotel prices and lumber along with generally surging consumer demand pumping up an economy that a year ago faced substantial government-imposed restrictions in the early days of COVID-19.
Those factors, Powell said, should “resolve themselves” in the coming months.
But on Wednesday, Atlanta Fed President Raphael Bostic and Fed Governor Michelle Bowman said that while they largely agree recent price increases will prove temporary, it may take longer than anticipated for them to fade.
“Temporary is going to be a little longer than we expected initially … Rather than it being two to three months it may be six to nine months,” Bostic told NPR.
Bowman said at a Cleveland Federal Reserve bank conference that prices are being driven by clogged supply chains and surging demand as the economy reopens but “it could take some time” for those factors to ease.
As Reuters reports, “Though some prices have begun to ease already, the higher prices have registered among elected officials, and forced the Fed to begin thinking about how to ensure prices do not spiral too high or too fast.”
Bostic now expects interest rates will need to rise in late 2022, a shift from when Fed policymakers felt that crisis levels of interest rates would need to remain in place into 2024.