Fed’s Kaplan Sees Risk of Inflation Settling Into US Economy By Reuters




© Reuters. FILE PHOTO: Dallas Federal Reserve Chairman Robert Kaplan speaks at the Commonwealth Club in San Francisco, United States, October 11, 2019. REUTERS / Ann Saphir

By Ann Saphir

(Reuters) – Dallas Federal Reserve Chairman Robert Kaplan on Friday spoke of the prospect of a worrying rise in inflation expectations in the United States, as imbalances between supply and demand for labor labor and goods exert upward pressure on prices.

Most U.S. central bank policymakers view the upward pressure – evident in a 4.2% annual consumer price hike last month – as transient, expecting supply chains to eventually catch up. higher demand, more workers returning to the workforce with rollout of COVID -19 vaccines alleviates safety concerns, and working parents have more flexibility as more schools and daycares reopen .

The spike in spending helping fuel prices rise will ease, they believe, once the extra savings are gone and government checks are spent. Imbalances will also ease, preventing any permanent upward change in the perception of inflation by businesses and households.

But Kaplan – an outspoken central banker whose opinions are sometimes at odds with those of his peers – isn’t so sure.

“What you don’t know is, depending on how long it takes, if it starts to build into inflation expectations, and you’re worried that inflation expectations will start to get higher, then you raise them to a higher level. level that is not consistent with their 2% peg, ”Kaplan said at the University of Texas at the McCombs School of Business in Austin. worries me – it’s a risk for me. “

And that’s one more reason Kaplan is calling on his colleagues at the Fed “sooner or later” to discuss scaling back the central bank’s bond buying program, as the pandemic is better controlled and the The economy is making substantial progress towards full employment and 2% inflation targets.

Kaplan said on Friday that contacts in industries affected by the global semiconductor shortage, for example, had told him it could take up to two years to resolve the issue.

Clogged chip supply chains led to a record hike in used car and truck prices last month. And it’s not just chips, Kaplan said on Friday: It’s unclear how long bottlenecks could last in many industries.

“There is more fiscal policy to come, demand could be increased for some of these products, and that actually creates some of the uncertainty,” he said.

‘MOVING’

There are signs that inflation expectations are starting to rise. Consumer estimates of inflation for the next five years climbed to 3.1% – the highest in more than a decade, a University of Michigan survey showed Friday.

This is one of the many measures the Fed uses to assess inflation expectations. Several Fed policymakers, including Fed Governor Christopher Waller, Cleveland Fed Chairman Loretta Mester and Fed Vice Chairman Richard Clarida, said last week that they believed expectations of inflation remained pegged at 2%.

“The central bank’s standard response to a supply shock is to examine it until it feeds inflation expectations,” Karim Basta, chief economist at III Capital Management, said on Friday in a note. to investors.

“It remains surprising how many Fed officials describe expectations as ‘well entrenched’ when these anticipatory measures are very much on the move. Perhaps if they miraculously ended here, they could be seen as fine. anchored, but that doesn’t seem to be the case, ”Basta said.

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