Fed Chair Powell: U.S. Inflation in 2021 Tied to Economic Reopening, Not a 1970s Repeat

Federal Reserve Chairman Jerome Powell said on Tuesday that the current rise in inflation in the U.S. is closely tied to categories affected by COVID-…

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23, 2021

3 min read

This story originally appeared on ValueWalk

Federal Reserve Chairman Jerome Powell said on Tuesday that the current rise in inflation in the U.S. is closely tied to categories affected by COVID-19, but still not as high as in the 1970s. Due to the Fed’s commitment to keeping prices low, such a scenario is “very unlikely.”

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U.S. Inflation Not As High As In The 1970s

However – during a round of questions from a special House panel – he acknowledged that the inflation pressures were tougher and more dogged than predicted, and that it is rooted in airline tickets, hotel prices, and lumber, as well as the sudden bounce in consumer demand.

“I will say that these effects have been larger than we expected, and they may turn out to be more persistent than we have expected,” he told the House Select Subcommittee as reported by CNBC.

“But the incoming data are very consistent with the view that these are factors that will wane over time, and inflation will then move down toward our goals and we’ll be monitoring that carefully,” he added.

Wholesale prices in the U.S. registered their highest year-on-year rise in history, rising 6.6%, while the PPI increased in May by 0.8% compared to 0.6% in April. Analysts had expected a 0.6% monthly rise to 6.3% over the last year.

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Still, Chairman Powell reassured the panel that these elements would resolve themselves, and that the Fed would not raise interest rates pre-emptively, “because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances.”

According to Reuters, he emphasized that the current situation is the result of “extremely strong demand for labor, goods, and services” intensified by the “supply side caught a little bit flat-footed.”

During the exchange, Rep. Steve Scalise, R-La., addressed Powell: “If you look at just the two mandates of the Federal Reserve, maximum employment and stable prices, right now we don’t have either and it’s because of policy decisions, policy decisions primarily by the Biden administration.”

At some point during the session, Powell retorted: “We will not just look at the headline numbers for unemployment. We will look at all kinds of measures (…) That is the most important thing we can do” to assure a balanced recovery.

According to Fed estimates from last week, prices in 2021 are expected to rise at a rate of 3.4%, higher than the 1.7% predicted as of last September.

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