US Braces For Higher Inflation amid Pandemic Improvement
The US is trialing ways of bracing the American public for higher inflation rates as a fresh presidency attempts to heal an economy crippled by the ongoing pandemic, according to the Federal Reserve.
Minutes released today from a lengthy policy meeting held by the US central bank last month revealed that Fed officials were prepared to keep their easy monetary policy on track to help the ailing American job market.
Newly-elected President Joe Biden has pledged to inject a $1.9tn fiscal stimulus package to pull the US economy out of the throes of the coronavirus crisis.
However, Fed officials are concerned Biden’s stimulus package could accelerate higher inflation trends.
The Fed has set a maximum inflation target of two per cent this year, as prices are expected to bounce amid the economy’s pandemic recovery. Annual inflation is currently only about 1.3 per cent in the US.
Boston Fed president Eric Rosengren said this afternoon that inflation is unlikely to hit the central bank’s target on a sustained basis in the coming year, though he warned prices will likely jump as restrictions are lifted in the US.
In the coming months “we are going to see somewhat of a pickup in inflation,” Rosengren said in a webinar with the University of New Hampshire Franklin Pierce Law School.
“Food and energy prices may go up as certain areas of the economy are facing some shortages,” he added. “But what we really want for inflation is kind of the broad-based inflation rate to be at a sustained level of two per cent. I don’t think we are going to see that this year. I would be surprised if we see it before the end of next year.”
Fed officials said they believe the threat posed by subdued inflation is greater than the danger of rapidly rising prices, “although most still viewed the risks as weighted to the downside”.
With a jump in some prices expected in the coming months, many Fed officials “stressed the importance of distinguishing between such one-time changes in relative prices and changes in the underlying trend for inflation,” according to minutes released today.
“A Number of” central bank officials said they saw such price increases on the horizon for goods “whose production has been subject to supply chain constraints, or soon could be”.
Others said they anticipated that “a possibly abrupt return to normal levels of activity could result in one-time increases in certain prices,” the Fed said.
Major US food producers including Heinz and Duncan Hines cake-maker Conagra this week said they were mulling possible price hikes this year as ingredients become increasingly expensive due to high demand during the pandemic.
However, the Fed said it did not expect price hikes to sustain in the long-term.
Minutes showed the US bank predicts prices will move higher “along a trajectory consistent with achieving the Committee’s objectives over time, supported by stronger economic activity, widespread vaccinations and the associated reduction in social distancing, and accommodative fiscal and monetary policy”.
“We’re going to be patient,” Fed chair Jerome Powell said at a news conference after the end of last month’s policy meeting. “We’ll seek inflation moderately above two per cent for some time. The way to achieve credibility on that is to actually do it. And so that’s what we’re planning on doing.”