Powell: Inflation likely to remain high before fading later this year

Federal Reserve Chair Jerome Powell plans to tell lawmakers Wednesday he expects inflation to remain high for several months before cooling off as the U.S. economy recovers further from the coronavirus pandemic.

In testimony released ahead of Powell’s appearance before the House Financial Services Committee, the Fed chief will argue that it is far too soon to raise interest rates or cut back on monthly bond purchases with “a long way to go” to a full recovery.

“These measures, along with our strong guidance on interest rates and on our balance sheet, will ensure that monetary policy will continue to deliver powerful support to the economy until the recovery is complete,” Powell plans to say.

Powell will appear before the House panel one day after the Labor Department reported a 0.9 percent increase in consumer prices last month, pushing the annual inflation rate to 5.4 percent, the highest in 12 years. While inflation had widely been expected to stay elevated this summer, the magnitude of June’s price jump alarmed many Republican lawmakers and inflation hawks, who will likely press Powell on the issue Wednesday.

Powell has argued throughout 2021 that rising inflation will cool off as several pandemic-related factors pushing prices higher begin to fade. He, along with a wide range of economists, has expressed confidence that the U.S. is at no major risk of suffering from uncontrollable price increases akin to the 1970s.

“Inflation is being temporarily boosted by base effects, as the sharp pandemic-related price declines from last spring drop out of the 12-month calculation,” he is set to say Wednesday.

“In addition, strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind,” the testimony continues.

“Prices for services that were hard hit by the pandemic have also jumped in recent months as demand for these services has surged with the reopening of the economy.”

Powell also plans to highlight how far the labor market is from returning to its pre-pandemic strength.

“Labor demand appears to be very strong; job openings are at a record high, hiring is robust, and many workers are leaving their current jobs to search for better ones,” Powell will say, pointing to the record levels of need for new workers.

“However, the unemployment rate remained elevated in June at 5.9 percent, and this figure understates the shortfall in employment, particularly as participation in the labor market has not moved up from the low rates that have prevailed for most of the past year.”