Two Federal Reserve officials said Friday morning that inflation could last longer than thought after the central bank’s most closely watched inflation gauge went up by the most in months. Fed Governor Philip Jefferson and Cleveland Fed President Loretta Mester said they are still worried about an inflation rate that is well above the Fed’s 2% year-over-year goal.
Mester said again that even though inflation has slowed down, it is still too high. She talked about recent research from the Cleveland Fed and a discussion paper that suggested inflation might last longer than is currently thought.
Mester said at the U.S. Monetary Policy Forum in New York, “I think the risks to the inflation forecast are more to the upside, and the costs of continuing high inflation are high.” “Since the job market is still strong, I think that the costs of undershooting policy or loosening it too soon still outweigh the costs of overshooting policy.”
The comments came after the Fed’s favorite way to measure inflation, the personal consumption expenditures (PCE) index, rose by 5.4% on an annual basis in January, which was not expected. If you take out the volatile prices of food and energy, the inflation gauge went up 4.7%. Both of these numbers are up after a few months of going down.
The PCE index went up 0.6% from December to January, which is a monthly change. Core prices also went up 0.6% from the month before, which was more than the 0.4% rise in December. The numbers came out on Friday, a week after the government released the Consumer Price Index, which also showed that inflation was picking up.
Mester, who doesn’t have a vote on monetary policy decisions this year, told Bloomberg in an interview on Friday morning that the latest inflation reading shows the Fed needs to keep raising interest rates, but he stopped short of saying it needed a 50-basis-point rate hike at the next policy meeting in March. Mester said last week that she wanted to raise the benchmark policy rate by 50 basis points at the last policy meeting to try to get to the peak rate faster, but she didn’t want to surprise the markets.
In a separate interview with CNBC on Friday morning, Mester said that her prediction from December that rates would go up by a bit more than 5% hasn’t changed much. Susan Collins, president of the Boston Fed, said at the same Monetary Policy Forum on Friday that inflation is still too high and that the Fed needs to do more work.
“Inflation remains too high, and recent data …all reinforce my view that we have more work to do, to bring inflation down to the 2 percent target”
“I anticipate further rate increases to reach a sufficiently restrictive level, then holding there for some, perhaps extended, time.”
Jefferson also spoke at the conference. He said that wages may be going down slowly because there aren’t enough people to do the jobs that need to be done.
“The ongoing imbalance between the supply and demand for labor, combined with the large share of labor costs in the services sector, suggests that high inflation may come down only slowly”
Jefferson also said that the things that cause inflation now are different from what caused it in the past, so economic models won’t be as useful to policymakers. Jefferson said that the current situation is different because the pandemic has messed up global supply chains in a way that has never happened before and is having a long-term effect on the number of people who work.
“The inflationary forces impinging on the U.S. economy at present represent a complex mixture of temporary and more long-lasting elements that defy simple, parsimonious explanation,” he said.
Jefferson says that he thinks the Fed is taking a more proactive approach to the rise in inflation than it did in the 1970s. This gives the Fed more credibility now.
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