‘Transitory’ U.S. Inflation Pressures Seen Lasting for Months

(Bloomberg) --

The unexpected surge in U.S. consumer prices last month has economists and policy makers struggling to figure out just how “transitory” inflation pressures will be, with some flagging the possibility that readings will take at least several months to settle down.

Federal Reserve Atlanta Fed President Raphael Bostic said Wednesday that he expects bouts of volatility around inflation through September. Inside the White House, aides see the “transitory” period of inflation pressures lasting potentially through the end of the year, according to one White House official who spoke on condition of anonymity.

April’s 0.8% monthly increase in the consumer price index, reported Wednesday, was the largest jump since 2009, and twice as much as the highest projection in a Bloomberg survey of economists. Assuming the figure reflects a reopening economy and supply bottlenecks -- as gains in used-car prices and airfares suggest -- economists said price pressures could dissipate within a few months.

“Any longer and they will start building into inflation expectations, which would then prompt a little more attention from the Fed,” Jennifer Lee, an economist at BMO Capital Markets, said in a note. “Then, the conversation will change.”

How long inflation readings persist on the high side has implications for when the Fed decides to start withdrawing monetary stimulus by paring back bond-buying and raising interest rates from near zero. For President Joe Biden, it will color talks over how much of the White House’s $4 trillion economic agenda makes it through Congress and provides ready talking points for Republicans looking to bolster their opposition.

Before the latest figures, Fed officials had repeatedly insisted that price pressures spurred by the post-crisis recovery would only be transitory, and that the central bank would tolerate inflation above its long-term target to make up for past shortfalls in prices.

“In general, the Fed won’t be able to get a sense of what the new normal looks like until at least the fall” because of the need to assess school openings, said Brett Ryan, an economist at Deutsche Bank AG. “Add it all up, and I would say that it will be at least six months for the Fed to get a sense of whether inflation pressures are transitory and more likely 12 months to make a firm conclusion in that respect.”

What Bloomberg Economics Says...

“Transient does not mean one month. As supply shortages run up against aftershocks from fiscal stimulus, and the base for comparison remains low, the CPI will continue to run hot into the summer. The impact of the Colonial pipeline shutdown on fuel prices will also have to be monitored closely.”

-- Andrew Husby and Yelena Shulyatyeva, U.S. economists

For the full note, click here

Bostic, speaking at a forum hosted by the Council on Foreign Relations, said that after September, “we will have to see what is happening with the supply chain disruptions and the commodities prices and those sorts of issues.”

“So for the next four to five months, I think we are going to see volatility and there’s going to be a lot of noise that surrounds the true signal.”

Jared Bernstein, a member of Biden’s Council of Economic Advisers, said on Bloomberg Television that as Americans begin to pursue travel and entertainment activities again, “firms are able to get to a more normal level of pricing. They’re not there yet, so there will be more bumps in the road.”

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