Fed’s Powell sees growing risk of ‘persistent’ higher inflation

Federal Reserve Chair Jerome Powell said Tuesday that the risk of “more persistent” higher inflation has grown as a spike in prices driven by pandemic-related supply and demand mismatches spreads across the economy.

Powell fielded questions about inflation from both Democrats and Republicans at a Senate Banking hearing. He appeared alongside Treasury Secretary Janet L. Yellen to testify about the implementation of the 2020 pandemic relief package.

“Generally, the higher prices we’re seeing are related to the supply and demand imbalances that can be traced directly back to the pandemic and the reopening of the economy,” Powell said. “But it’s also the case that price increases have spread much more broadly in the recent few months across the economy. I think the risk of higher inflation has increased.”

The consumer price index rose 6.2 percent in October compared with a year earlier, the Bureau of Labor Statistics reported, the biggest annual increase since 1990.

The Fed aims to maintain long-term inflation at 2 percent, Powell said. The central bank prefers a different inflation gauge that typically runs lower than the index, but the main personal consumption expenditures price index was still up 5 percent over the past 12 months in October, the Bureau of Economic Analysis reported last week — also a 31-year high.

“My baseline expectation is still … that most forecasters feel that inflation will move back down over the course of next year closer to our target, but clearly the risk of more persistent inflation has risen,” Powell said. “We will use our tools to make sure that higher inflation does not become entrenched.”

Powell said the Fed underestimated the challenges facing supply chains in its earlier predictions that inflation would subside by the end of this year.

Getting inflation under control is key to President Joe Biden’s economic agenda.

But Powell’s comments may aid moderate Democrats such as Sen. Joe Manchin III of West Virginia, who has cited inflation to criticize Biden’s climate, social and economic policy package. Objections from Manchin and other moderates, including Sen. Kyrsten Sinema, D-Ariz., have already cut the package’s price tag from $3.5 trillion to about $2 trillion.

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