Supply bottlenecks make the Fed focus on continued inflation
By U.S. standards, Canadian inflation looks fairly modest. But the picture drawn by Fed Chairman Jerome Powell suggests that we should expect price increases to continue for some time.
Hours after Statistics Canada reports that inflation has risen Down to 3.1% Here-down from 3.6% last month, but still above the Bank of Canada’s target range-Powell expressed concerns that future consumer prices may be “higher and longer lasting.”
With the influx of pandemic savings into the economy, the US economy is heating up faster than Canada.
However, during the severe collapse of COVID-19 demand, it slowed to near cessation and it was difficult for global industries to resume normal operations.
Supply of key overseas parts Car production has been discontinuedFor example, those offered by leading leasing companies in bidding. People who need cars to return to work have been pushing up the price of used cars. Many common small appliances are not available, which induces retailers to increase the prices of some small appliances.
Economists call this the bottleneck effect. If you are pouring whiskey, the bottlenecks are good because they can prevent liquid from running down your throat all at once.
But like a group of cars trying to leave a burning theater through a small door or on a highway suddenly reduced to a lane, passing that narrow point can have destructive and distorting effects.
Powell said after the Federal Reserve’s monetary policy on Wednesday: “As the economy continues to reopen and spending rebounds, we see upward pressure on prices, especially because supply bottlenecks in certain industries limit the speed of recent production response.” The statement.
Although professions like hair stylist are not affected by the shortage of microchips, the bottleneck effect still exists. Without a haircut for a year, if everyone wants to trim or dye their hair once, even if every stylist goes all out, it will form a bottleneck. In many service industries, it is difficult for employers to find workers.
“These bottlenecks are larger than expected, but as these temporary supply effects diminish, inflation is expected to fall back to our long-term goal,” Powell said.
Break through the bottleneck
The Fed chairman cited timber as an example. As everyone wanted to build a platform immediately, the price of timber hit a record high, but fell back to the pre-pandemic price after demand slowed down.
Powell said that not all prices must follow the direction of wood development-but he hopes that many people will do the same.
This is because if bottleneck pricing persists, people will increasingly worry that once people get used to price increases, they will increasingly expect price increases.
Powell told reporters at a virtual press conference on Wednesday: “We must take the risk situation seriously, that is, inflation will be more persistent and will actually push up inflation expectations.”
As suggested by the Bank of Canada and many other institutions, Inflation expectations have a strong influence on inflationIn other words, if we all think that prices will rise, then they will.
After the year’s inflation expectations were too low, central bank governors here and in the United States are not unwilling to see such changes. In fact, as Powell made it clear on Wednesday, the Fed plans to maintain interest rates at today’s lowest level until minimum-wage workers find work and inflation stays above the target for a long time.
When the reporter asked him how long it lasted and how much above the target, Powell frankly said that the current level of inflation – More than five percent —— Exceeded the bank’s expectations and caught it by surprise.
This is another matter
Powell said: “As you know, for some time, our goal is to moderately overshoot an inflation rate of 2%.” “That would be a healthy thing. This is another matter. This is not the case.”
Powell had expected that kind of inflation in a booming economy and a strong labor market. The strong and long-lasting bottleneck effect is unexpected.
Watch | How the pandemic raises some prices:
“This is actually driven by the supply side, and the supply side cannot cope with the surge in demand that we are seeing,” he said. “All over the world, you see the same thing.”
So far, Powell has stated that he still believes that the inflation bottleneck effect will ease before it penetrates into our price expectations. But if this does not happen, he said he will use all the tools of the central bank, including cutting bond purchases and raising interest rates, to bring it back under control.
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