Yellen, who formerly led the central bank, said Sunday that “unacceptably high” inflation will permeate the economy for at least the rest of the year, a prospect that hurts Democrats’ chances of retaining control over the House and Senate.
“We’ve had high inflation so far this year, and that locks in higher inflation for the rest of the year,” she said Sunday on ABC. “I expect the economy to slow.”
Some economists thought the country’s historic inflation had peaked when it dropped to an 8.3% annual rate in April. But then, May’s consumer price index report showed inflation rising even more to 8.6%, the briskest pace since 1981. The Fed responded last week by raising interest rates by three-quarters of a percentage point, the most aggressive increase of the federal funds rate since 1994.
While Yellen said economic growth will contract as a result of the Fed’s mission to drive down inflation, she added that the economy tumbling into a recession is not an inevitability.
Top officials at the Fed are also warning consumers to be prepared to feel the sting of inflation for months to come.
Loretta Mester, president of the Federal Reserve Bank of Cleveland, said over the weekend that it will likely take two years for inflation to fall back to the central bank’s target range of around 2%. She said that during that time, it will be tumbling gradually instead of suddenly dropping.
“It isn’t going to be immediate that we see 2% inflation. It will take a couple of years, but it will be moving down,” Mester said on CBS News.
Mester isn’t the only Fed official cautioning about the stickier-than-anticipated inflation. Federal Reserve Bank of St. Louis President James Bullard recently said the high prices, and the Fed’s inability to drive inflation down thus far, are hurting the central bank’s reputation.
“U.S. inflation is comparable to levels seen in the 1970s,” Bullard said. “The current U.S. macroeconomic situation is straining the Fed’s credibility with respect to its inflation target.”
This year, the Federal Open Market Committee has revised its own forecasts for how long the higher prices will stick around.
As of its meeting last week, Fed officials expect inflation, gauged by the Fed’s preferred personal consumption expenditures price index, to remain elevated at 5.2% by the end of the year — nearly a percentage point higher than it projected in March. Inflation will remain higher than wanted in 2023, ending the year up 2.7%, according to the projections.
In December, when inflation was at 7% and accelerating, the consensus among Fed forecasters was that 2022 would end with inflation only at 2.6%, showing just how much the central bank underestimated inflation’s staying power and overestimated its ability to drive down prices efficiently. The Fed targets 2% inflation.
It is worth noting that the war in Ukraine has been a significant contributor to inflation, causing energy prices to explode on the supply side, which translates to higher prices across the board. The Fed has little ability to mitigate price increases resulting from supply snarls such as the war in Ukraine and supply chain problems originating in China.
Many economists also blame excessive government spending during the first year of President Joe Biden’s term as another major factor behind the high inflation. Republicans have used it as a cudgel against the administration and congressional Democrats.
Longer-lasting inflation will be the biggest issue in both parties’ political calculus going into this year’s midterm elections. Inflation is far and away the main issue on voters’ minds this year. A Pew poll released last month found that 70% of those queried described the higher prices as a “very big” problem.
Biden’s approval rating has moved inversely with inflation.
A Morning Consult/Politico survey released earlier this month found that 58% of voters disapprove of Biden’s job performance and just 39% approve, the lowest level that the poll has registered since he took office.
While Biden is not up for reelection for another two years, Republicans have used Democrats at large as a proxy for his administration’s perceived failures regarding inflation.
Meanwhile, Biden and Democrats are pushing their own narrative about inflation, focusing on externalities from Russia’s war in Ukraine and global supply chain troubles that are largely out of the control of Congress and the president.
Yellen said Sunday that the factors driving inflation are “global, not local.” She added that “these factors are unlikely to diminish immediately.”
Biden has also emphasized Russia’s role in global inflation. He has repeatedly branded the phenomenon as “Putin’s price hike,” a reference to Russian President Vladimir Putin, who launched the war in Ukraine.
Some Democrats to the left of Biden have even taken their inflation claims a step further and are blaming corporate America for the higher prices. Politicians such as Sen. Elizabeth Warren (D-MA) have said greedy corporations are pushing inflation higher in an effort to turn a profit.
Many economists, though, believe that there isn’t a single cause for the country’s historic price increases. They cite the war in Ukraine’s effect on energy prices, an economy flush with fiscal stimulus, and supply chain bottlenecks as contributing factors to the inflationary plague.
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