Two Federal Reserve officials on Friday morning hinted that inflation could last longer than thought after the central bank’s most closely watched inflation gauge posted the sharpest rise in months.
Cleveland Fed President Loretta Mester and Fed Governor Philip Jefferson said they remain concerned about an inflation rate well above the Fed’s annual target of 2%.
Mester reiterated that while inflation has moderated, overall levels are still too high. She pointed to recent Cleveland Fed research and a discussion paper that suggest inflation could be more persistent than currently expected.
“I see the risks to the inflation forecast as on the upside and the costs of sustained high inflation as significant,” Mester said at the US Monetary Policy Forum in New York. “In my view, at this point in time, with the labor market still strong, the cost of undershooting policy or easing policy ahead of schedule still outweighs the cost of overshooting it.”
The comments came as the Fed’s preferred measure of inflation — the Personal Consumption Expenditure (PCE) index — unexpectedly accelerated in January, rising 5.4% on an annualized basis last month. Excluding volatile food and energy prices, the inflation gauge rose 4.7%, both marking a rebound after several months of decline.
On a monthly basis, the PCE index increased by 0.6% in January compared to December. Core prices also rose 0.6% mom in January, compared to a 0.4% rise in December. Friday’s figures came a week after the government released the consumer price index, which showed a similar rise in the inflation rate.
Loretta J. Mester, President and CEO of the Federal Reserve Bank of Cleveland, looks over Teton National Park where financial leaders from around the world gathered for the Jackson Hole Economic Symposium outside of Jackson, Wyoming, the United States, August 26, 2022. Portal/ Jim Urquhart
Mester, who doesn’t vote on monetary policy decisions this year, told Bloomberg in an interview Friday morning that the latest inflation data show the Fed needs to raise rates again, but didn’t suggest a 50 basis point rate hike was needed at the next Policy meeting in March. Mester said last week she planned to raise interest rates by 50 basis points at the last meeting to try to reach the top rate faster, although she also didn’t want to surprise markets.
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In a separate interview with CNBC on Friday morning, Mester signaled that her December forecast of raising rates just over 5% hadn’t changed significantly.
Boston Fed President Susan Collins said Friday at the same monetary policy forum that inflation is still too high and the Fed has more work to do.
“Inflation is still too high and the latest data … reinforces my view that we still need to do more to bring inflation down to the 2 percent target,” Collins said. “My expectation is that further rate hikes will reach sufficiently restrictive levels and then stay there for some, maybe longer time.”
Jefferson also told the conference that a limited supply of labor for needed jobs, which has pushed up wages, suggests inflation is slowly cooling.
“The persistent mismatch between labor supply and demand, coupled with the large share of labor costs in the service sector, suggests that high inflation may be slow to come down,” he said.
Jefferson also said the forces driving inflation now are different than previous episodes of inflation and therefore economic models would not be as helpful to policymakers. Jefferson said the current situation is different as the pandemic has caused unprecedented disruptions to global supply chains and has had a lasting impact on the labor force participation rate.
“The inflationary forces currently affecting the US economy represent a complex mix of temporary and longer-lasting elements that defy simple, parsimonious explanation,” he said.
Jefferson says he thinks that unlike in the 1970s, the Fed is proactive in responding to rising inflation and now has more credibility.