Powell’s benign view of inflation goes back to the Fed and elsewhere

Federal Reserve Chairman Jerome Powell’s belief that the inflation winds hitting the U.S. economy this year will soon subside is not universally shared.

In fact, a growing contingent in the Fed’s virtual rooms is worrying that supply chain disruptions, growing demand, and labor and supply shortages could drive the current trend through 2022 and beyond.

Patrick Harker, the president of the Philadelphia Fed, said the same Friday in a CNBC interview that aired just before Powell delivered his keynote address at the Jackson Hole symposium.

The Fed has not only achieved the inflation share of its mandate by keeping the level above 2% for a period of time, but it also faces the challenge that these price pressures do not seem to be fading, he said. Harker.

“There are also some tests that may not be as transient, and that’s a risk that worries me,” the central bank official said in an interview about two hours before Powell’s speech.

Business contacts in the Harker region “are seeing clear price pressures,” he added. “What I’m hearing is that they’re trying not to pass on most of that to the consumer and the customers … That said, they go through a bit. That’s inevitable. So far people have understood. That won’t last forever. At some point, we have to control it. “

These comments contrasted with Powell’s speech.

The Fed chief took a long step in the comments to refute the idea that inflation posed a long-term structural problem for the economy. He attributed most of the current rise in prices to an increase in longer-lasting “durable” goods that in pre-pandemic times had a long-standing negative inflation rate.

In addition, he said there is evidence that a key area of ​​inflation, used vehicle prices, has stabilized and is likely to bring the overall rate closer to the longer-term trend. On Friday morning, the Commerce Department reported that the Fed’s preferred inflation indicator, the personal consumer spending price index, had expanded 3.6% from a year ago, the fastest pace in about 30 years.

“Rising inflation so far is the product of a relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy,” Powell said. “We are also directly monitoring the prices of certain goods and services most affected by the pandemic and reopening, and we are beginning to see moderation in some cases as shortages are reduced.”

That’s not what Mike Kucharski, the owner of Summit, JKC Trucking, based in Illinois, sees in his daily business meetings.

Instead, it is witnessing rising freight rates caused by declining capacity, rising demand and sharply higher energy prices. The lack of food ingredients – he cited gluten for bread as an example – along with other raw materials are also driving inflation.

The situation is aggravated by long delivery seasons, as congested ports aggravate the shortage of goods. Labor is also scarce, with workers reluctant to return to work, as there are more than 10 million jobs, a record for the US

“The catalyst for food price growth is that fuel has gone up, our insurance has gone up, all costs have gone up, including extra pay for labor,” Kucharski said. “Stimulus controls don’t help because even while truckers have been working on the pandemic, we’re delivering ourselves to warehouses where some of them take two or three days to unload because they don’t have the capacity and strength of work “.

In fact, freight transportation costs that had been declining from mid-2018 until the pandemic have risen to record levels since then. The loading rate of long-haul trucks jumped 28.5% from a year ago in May, easily the highest data recorded until December 2004 and rising at a still astronomical rate of 20 , 5% in July, according to data from the Department of Labor.

These are the types of expenses that eventually find their way to storing shelves.

“All the additional costs we receive have to be passed on to customers,” Kucharski said. “Our margins are very small.”

The impact felt by companies like JKC Trucking is on the minds of several Fed officials, who are concerned that rising costs will especially affect low- and moderate-income households that have the least capacity to absorb them.

Over the past two days, no fewer than five Fed regional presidents have said it was time to start withdrawing from the easy money policies of the past year and a half, citing various levels of confidence in the economy eased. for inflation concerns.

“We want to make sure we’re in this, because high inflation or anything close to runaway inflation will really hurt people at the bottom of the scale,” the Fed chairman told CNBC on Friday. of Atlanta, Raphael Bostic.

Fed Vice President Richard Clarida was a notable exception, telling CNBC on Friday that he agreed with the “transitional” view of inflation, though he noted the higher pressures in place now.

“What I would say is my basic vision, is that it’s largely transient,” he said. “I think the risks to inflation are increasing and that’s why I think my colleagues will study the data closely.”

For his part, Powell admitted that the Fed has likely reached its 2% inflation target not only in the short term but also in a longer trajectory. In a rare revelation of what happens behind closed doors in the Fed, Powell said he and others, at the July meeting of the Federal Open Market Committee, agreed that at least it’s time to start withdrawing their $ 120 billion. of dollars monthly in bond purchases. , although rate hikes will be an independent consideration that will be saved for later.

Powell also acknowledged that inflation “is a cause for concern,” but said current levels “are likely to be temporary.”

But since the conditions that generate inflation are not diminishing, Kucharski said it is likely that the problems will now persist at least next year and perhaps beyond.

“Everyone raises costs just to stay afloat and keep the wheels rolling,” he said. “But it’s affecting the end user, the American people. We’ve passed our current rate on the shelves.”