Fed’s Clarida says inflation on track to fade despite overshoot

Federal Reserve Vice Chairman Richard Clarida on Monday said that the primary force behind higher inflation is on track to fade despite price growth rising “much more” than the Fed’s long-run goal.

In a Monday speech, Clarida expressed confidence that inflation would fall in line with the bank’s forecast next year and allow the Fed to hold off on interest rate hikes until the end of 2022. The Fed’s No. 2, however, warned that another year of inflation far above the bank’s ideal range was still a risk amid growing strain on supply lines.

“These imbalances are likely to dissipate over time as the labor market and global supply chains eventually adjust and, importantly, do so without putting persistent upward pressure on price inflation and wage gains adjusted for productivity. But let me be clear on two points,” Clarida said at a Brookings Institution symposium.

“Inflation so far this year represents, to me, much more than a ‘moderate’ overshoot of our 2 percent longer-run inflation objective, and I would not consider a repeat performance next year a policy success,” he continued. “Second, as always, there are risks to any outlook, and I and 12 of my colleagues believe that the risks to the outlook for inflation are to the upside.”

The Fed’s ideal level of annual inflation is 2 percent as measured by the personal consumption expenditures (PCE) index, one of several gauges of price growth calculated by the federal government. The bank last year adopted a strategy to allow inflation to run above that 2-percent target long enough to make up for more than decade of low price and wage growth.

Inflation, however, has remained higher than the Fed’s target — and for longer than bank officials anticipated earlier this year — as the global economy struggles to shake off pandemic-related constraints.

The PCE index grew 4.4 percent in the year leading into last September, according to data released last month by the Commerce Department, and 0.3 percent since August. While monthly price increases have begun to stabilize, some economists expect inflation to accelerate again as holiday shopping picks up and winter weather threatens smooth transportation.

“Most of the inflation overshoot relative to the longer-run goal of 2 percent will, in the end, prove to be transitory. But as I have noted before, there is no doubt that it is taking much longer to fully reopen a $20 trillion economy than it did to shut it down,” Clarida said.

Inflation began to rise at the start of 2021 as prices continued to recover from steep drops at the onset of the pandemic. COVID-19 vaccines, along with steady fiscal and monetary stimulus also, helped power a much quicker rebound than many economists had expected in 2020.

Consumer demand has recovered far quicker than many factories, ports, trucking companies and suppliers have been able to handle and the emergence of the delta variant in July caused a series of rippling shutdowns and delays that have kept up pressure on consumer prices.

The Fed announced last week that it would begin paring back its monthly purchases of Treasury and mortgage bonds given the progress of the recovery and the persistence of high inflation.

While inflation has boosted pressure on the Fed to hike rates as well, most Fed officials say higher borrowing costs would do little to counter pressures driven by the pandemic and hinder the labor market from a full recovery.

“We are clearly a ways away from considering raising interest rates,” Clarida said, adding that it would likely be necessary if the unemployment rate drops to 3.8 percent by the end of next year. The jobless rate in September was 4.7 percent, just 1.2 percentage points above the pre-pandemic low of 3.5 percent.