“very, very unlikely” that the US will experience 1970s-style inflation


Federal Reserve Chairman Jerome Powell admitted Tuesday that inflationary pressures are stronger and more persistent than he expected, although it still does not compare to some of the worst episodes in US history.

In consultation with a special House Council, the central bank chief continued to attribute most of the recent surge in inflation to factors closely related to the reopening of the economy.

Among them, Powell cited airline tickets, hotel prices, and lumber along with an overall surge in consumer demand that fueled an economy that faced significant government-imposed restrictions a year ago in the early days of Covid-19.

These factors should “resolve themselves” in the coming months.

“You are not talking about a generally tight economy and things that have led to higher inflation over time,” he told the House Select subcommittee on the coronavirus crisis. Powell’s mandatory testimony provided an economic update and covered the pandemic-related tools Congress gave the Fed during the crisis.

“I’ll say these effects were bigger than we expected and they may turn out to be more lasting than we expected,” he added. “But the data we receive is very much in line with the view that these are factors that will wear off over time and then inflation will fall towards our targets and we will monitor that carefully.”

Headline price inflation rose 5% yoy in May, its highest in nearly 13 years as used car prices rose and a number of other goods that saw demand rise as restrictions eased.

The latest update on the Fed’s preferred inflation meter, the core consumer spending index, comes on Friday. The Dow Jones estimate expects a year-on-year increase of 3.4% in May, higher than the 3.1% in April. If this estimate is correct, it would be the highest since April 1992.

Promises price stability

The Committee’s Republicans repeatedly urged Powell whether the economy was headed for the hyperinflation of the 1970s and early 1980s, when inflation peaked above 10%.

Powell said such a scenario was “very, very unlikely”.

“What we are seeing now, we believe is inflation in certain categories of goods and services that are directly affected by this unique historical event that none of us have ever witnessed before,” he said.

He added that the current situation is caused by “extremely strong demand for workers, goods and services” which is compounded by a “supply side that has been left a little by the wayside”. Powell promised that the Fed would be vigilant in its role.

“You have a central bank that is committed to price stability and has defined what price stability is and is well prepared to use its tools to keep inflation around 2%,” he said. “All of these things indicate to me that an episode like the one we saw in the 1970s … I don’t expect something like this to happen.”

But the Republicans on the panel pushed back the inflation narrative, largely blaming the Biden administration’s economic policies for creating upward pressure and potentially causing the Fed to raise interest rates.

“If you just look at the Federal Reserve’s two mandates, maximum employment and stable prices, we don’t have either right now, and that’s because of political choices, mostly from the Biden administration,” said Rep. Steve Scalise. R-La.

But New York Democratic MP Carolyn B. Maloney said she was more concerned that the Fed is reacting hastily to inflationary pressures that she agreed will not last. MP Maxine Waters, D-California, also said she wasn’t too concerned about inflation.

“I’ve never really worried about inflation, but I want to keep an eye on that and I want you to keep us updated on what’s going on in our economy,” Waters told Powell.

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