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Federal Reserve Chairman Jerome Powell on Wednesday said a bout of high U.S. inflation could be prolonged into early next year because parts and material shortages might be getting worse.
Powell stuck to his view that inflation will cool off in 2022 as shortages ease. Yet he did not give a precise timetable, saying supply bottlenecks are not clearing up as quickly as he had hoped.
“It’s frustrating to see the supply chain problems not getting better, in fact they are probably getting worse,” Powell said during a virtual forum with other central bank leaders. “It’s very difficult to say how big the effects will in the meantime and how long they will last.”
The rate of inflation in the U.S., using the Fed’s preferred PCE price gauge, rose at a 4.2% pace in the 12 months ended in July. That’s the fastest increase in 30 years. Inflation is running even hotter based on the better known consumer price index.
Read: Inflation in the U.S. is running at the highest level in 30 years
Also: Fed’s Williams predicts the high rate of inflation will cool to 2% in 2022
Nonetheless, the U.S. central bank predicted in its most recent forecast that inflation will slow to 2.2% by the end of next year.
Powell and the Fed have contended for months that the surge in inflation was ‘transitory.” The reopening of the U.S. economy led to an explosion in pent-up customer demand that companies were unable to meet, a problem exacerbated by shortages of key parts such as computer chips. The result: Higher prices.
Once these shortages fade and the global economy returns to normal, the thinking goes, inflation will subside.
“Transitory inflation means that the inflationary spike will not lead to higher ongoing inflation, Powell said.
Read: The Fed has bet on a future of low inflation. Here’s what could go wrong
At the beginning of the year, the Fed was forecasting an inflation rate of 1.8% for 2021. Asked how the Fed could get its inflation forecast so wrong, Powell said hardly anyone foresaw the development of major shortages.
“No one forecast that,” Powell said. He pointed out that the so-called Blue Chip forecast of prominent U.S. economists expected 2% inflation in 2021.
Powell also denied the Fed is overdoing it by keeping a key interest rate near zero and buying trillions of dollars in Treasury bonds and mortgage-backed securities.
“I don’t think so,” he said. Central banks have far too often reacted slowly or insufficiently during major crises, he said.
