A chill Fed, cool inflation, and a long list of reasons not to worry (so
far)
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[May 24, 2021] By
Howard Schneider
WASHINGTON (Reuters) - With inflation fears
buzzing in markets and political circles, Federal Reserve officials have
laid out long, itemized lists for why they feel a recent jump in the
price of many goods won't spiral into a larger problem.
There is some simple math involved. But mostly their arguments rely on
the balancing dynamics of supply and demand, a dash of public
psychology, and some faith that the same forces that have kept inflation
tame since the 1990s, be it international trade or internet-driven price
competition, will continue to do so after the pandemic.
Most of the arguments also have a counter - and a risk - if the economy
that emerges from the pandemic works differently than before. That would
force the Fed away from its current efforts to encourage maximum job
growth, and back into its old role of hiking interest rates until prices
ease, usually because people start getting fired from jobs as the
economy slows and their purchasing power - a key driver of inflation -
diminishes.
But, for now, the Fed is comfortable it can have it all - a strong
economy, continued job growth, and inflation that behaves itself.
Here's a look at the current drivers of inflation and what's known about
the Fed's assessment of the risks: (Graphic: All about the base,
https://graphics.reuters.com/
USA-FED/INFLATION/
yzdpxzjlmpx/chart.png)
BASE EFFECTS - Simple arithmetic is one reason Fed officials are not
worried about a jump in inflation, even though the consumer price index
recently recorded its biggest annualized jump, of 4.2%, in over a
decade. Prices today are being compared with a year ago, when they were
falling rapidly at the start of the pandemic, so even a return to normal
would mean a big increase now. Those early pandemic months will
eventually fade into the past and "fall out" of future calculations,
meaning lower inflation down the road. (Graphic: Fiscal fades fast,
https://graphics.reuters.com/USA-FED/INFLATION/
jbyprynokve/chart.png)
FADING FISCAL STIMULUS - The U.S. government took unparalleled steps to
transfer money to households and businesses, fueling consumer spending
during the pandemic shutdown and priming family savings accounts for
more to come. Next year, not so much. Price pressures from that
emergency spending should fade. (Graphic: Commodities surge,
https://graphics.reuters.com/USA-FED/INFLATION/
qzjvqbmqmpx/chart.png)
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The Federal Reserve Board building on Constitution Avenue is
pictured in Washington, U.S., March 27, 2019. REUTERS/Brendan
McDermid/File Photo
COMMODITIES SURGE - The consumer spending arising from that fiscal support
surprised manufacturers, who scrambled for raw materials, stretching supplies
and pushing up prices. But families are not likely to buy a second refrigerator
or motorcycle. Once the bulge in demand is satisfied, prices should ease.
(Graphic: Labor slack,
https://graphics.reuters.com/USA-FED/INFLATION
/jznpnrmdypl/chart.png)
LABOR SLACK - There are currently about 4.5 million fewer 25-54 year olds in
jobs than before the pandemic. That prime-age population is expected to return
to work. In the meantime, any pressure to raise wages and cover it with price
hikes will be more moderate than it would be otherwise. A range of labor market
indicators are out of whack right now, and until people are working the hours
they want, labor "slack" should keep other prices in line.
(Graphic: What's imagined is real,
https://graphics.reuters.com/USA-FED/INFLATION/
gjnpwnreqvw/chart.png)
INFLATION EXPECTATIONS - Ultimately, Fed officials are not concerned about a
breakout bout of inflation because their success in keeping price increases
moderate for three decades means families, businesses and major investors all
now expect inflation to stay tame. Those "well-anchored expectations" are a
potent weapon. The Fed feels its credibility in controlling inflation means if
prices do threaten to become unmoored, it can quickly snap public psychology
back into line. (Graphic: The high cost of breakout inflation,
https://graphics.reuters.com/USA-FED/INFLATION/
bdwpkwyyzpm/chart.png)
(Reporting by Howard Schneider; Editing by Dan Burns and Nick Zieminski)
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