An official of the American Federal Reserve (Fed) estimated Friday, in a speech delivered in Cleveland, that “the picture of inflation is less favorable” than what the trends seemed to indicate at the start of the year. “The inflation picture is less favorable than what it gave to see at the start of the year”, admitted Lisa Cook, one of the governors of the Fed, “part of the disinflation observed in the last quarter (of 2022 , Editor’s note) disappeared while inflation for the first two months was high”. Under these conditions, the Fed “could still have work to do” to reduce inflation, added Ms. Cook for whom “further tightening” of monetary policy seems “appropriate”.
The PCE inflation index, which is the one the Fed wants to bring back towards its 2% target, was published earlier on Friday, with inflation still estimated at 5% year on year in February, admittedly down from compared to January (5.4%) but still up over one month (+0.3%). But above all, inflation now seems to be fueled almost exclusively by core inflation, i.e. excluding food and energy prices, which was 4.7% over one year on last month. However, the Fed has raised its interest rates sharply over the past year, bringing them between 4.75% and 5% during the last increase, in mid-March, after an increase of 0.25 percentage points, and plans to tighten the screw again.
“All the data points to higher inflation for this year, as well as stronger than expected growth,” added Ms. Cook, who also pointed out that “the job market seems to be slowing down but at the margin”. The latter seemed to show the first signs of a slowdown in mid-March, with a slight rise in the unemployment rate in February, which nevertheless remains historically low, at 3.6%. Many sectors are still facing recruitment difficulties, which encourages them to keep their employees, even if activity weakens.
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Faced with this persistence of inflation, Lisa Cook thinks that the Fed “will not be able to meet its dual mandate”, of maintaining a rise in prices around 2% and full employment, and will risk sacrifice one to achieve the other. Echoing the words of central bank chairman Jerome Powell, she said “the process of returning to 2% inflation is a long road that is expected to be uneven and bumpy.”
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