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The Consumer Price Index rose 5.4% last month compared to a year ago — the biggest monthly jump since 2008. During testimony on Capitol Hill Wednesday, Federal Reserve Chairman Jerome Powell gave his assessment about the price surge and risks of inflation. David Wessel, the director of The Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, joins Judy Woodruff to discuss.
As we heard earlier, Democratic lawmakers have high hopes for new spending. but there are concerns about the notable hike in inflation in recent months.
The Consumer Price Index rose 5.4 percent last month compared to one year ago. It was the biggest one-month jump since 2008. Prices for used cars drove a significant part of that increase, but costs for many goods and services rose.
During testimony on Capitol Hill today, Federal Reserve Chairman Jay Powell gave his assessment.
Inflation has increased notably, and will likely remain elevated in coming months, before moderating.
Inflation is being temporarily boosted by base effects, as the sharp pandemic-related price increases from last spring drop out of the 12-month calculation. 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.
Chairman Powell was asked a number of questions about the risks of inflation and how it might affect the economy.
David Wessel is the director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. And he joins us now.
David Wessel, welcome back to the "NewsHour."
So, fill us in a little more on what is driving these price increases and how significant are they?
Well, it's hard to argue that they're insignificant when you see 5 percent jump in prices in one year.
What's driving them, in part, is that the economy has recovered faster than a lot of producers expected, so you have got demand going up and supply is not able to meet it. And that is leading to price increases.
And there are also are some unusual bottlenecks, the fact that rental car companies didn't buy a lot of cars, so they're not selling a lot of cars on used car lots, is partly responsible for driving up the price of used cars. And, similarly, we have a chip shortage that's leading lots of things that use computer chips, which is almost everything these days, to suffer increases in price because supply is restrained.
So, was the Federal Reserve and was the Biden administration caught off-guard on this?
Yes, I think that — one of the things Chair Powell said in the congressional hearing is that inflation has been higher than we expected and a little bit more persistent than we had expected and hoped.
So they knew this was coming, but it's more than they anticipated, and I think that's got some of them a little bit worried.
But they still are arguing, for the most part, as I understand it, that this is not a long-term problem. What is the basis for their believing that?
Well, basically, what they say is that, to the extent that this is caused by temporary bottlenecks, by the fact that so many more people are getting on airplanes, that so many people are going out to eat, that we have these temporary supply shortages, that's going to abate.
And, indeed, we have seen a little bit of that, already. Lumber prices went up and they came down. Prices of containers, those things that go on big ships, went up, and they have come down. So what they're counting on is this is all temporary and once things get a little back to normal, prices will return — will fall and the average inflation rate will move close to the Fed's 2 percent target.
But, on the other hand, as you pointed out, there's another point of view on the part of people like the former Treasury Secretary Larry Summers and others, who say, no, wait a minute, this inflation should be a big concern.
So people like Larry Summers, Larry Fink, who's the head of BlackRock, a big Wall Street you remember firm, the folks at Bridgewater, a hedge fund, they are all saying essentially that the Fed is too complacent, that while some of this is temporary, they're worried that some of it is not temporary, that housing prices are going to continue to rise because demand exceeds supply, that wages are starting to go up.
And they're afraid the Fed will wait too long to raise interest rates and repeat the mistakes they made in the 1970s, when they let inflation get out of control. On the other hand, other people look at a different historical period and said, this is something like the end of World War II.
There is a lot of disruption because we have come back from the pandemic, and they expect this to decline. One really important thing is what economists call inflation expectations. If financial markets in particular begin to build in expectations then that we are going to see much faster inflation, that could lead to a self-fulfilling problem.
And what determines whether that's going to happen or not?
Does supply grow enough to meet the demand?
And there are a lot of people who are not working now who were working before the pandemic. Do they all come into the job market and does that temper the pace of wage increases? So it really depends who these bottlenecks are long-term problems or just temporary as we get out of this very unusual period.
I don't think anybody really knows for sure. The Fed is definitely betting that this is temporary. And that — and, interestingly, the financial markets seem to believe that. The financial markets are not predicting the kind of big increase in inflation that Larry Summers or Larry Fink are talking about.
David, if the Fed is wrong, what are the consequences?
Well, if the Fed decides it was wrong — and Jay Powell made this point today — they may raise interest rates sooner than people are anticipating.
If they don't do that and they're wrong, we could get more inflation. In my opinion, because inflation has been so low, it might not be such a bad increase, but if it's a big increase, and the Fed overreacts, you could have a run-up in inflation, an increase in interest rates, and then a recession.
Historically, that was quite common. It hasn't happened for the last quarter-century. But that's the risk. They let it get out of control, they have to react abruptly by raising rates, and then we have an unwelcome recession.
Watching it all very closely.
David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.
Thank you, David.
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