There are grounds for concern about inflation in the United States :: Investor.bg

The jump of consumer prices in the United States 4.2% year-on-year in April was a shock. But was there a good reason to panic? Obviously not, as special factors may explain it. It has always been this way: when inflation starts to rise, special factors on duty can explain it. But in fact, the big reasons for concern are not what is happening now, but rather the current political forces, writes Martin Wolf for the Financial Times.

Naturally, economic forces shape these political choices. And these forces are quite confusing at the moment. The unexpectedly large jump in consumer prices was followed by an unexpectedly weak employment report: in April, the United States added only 266,000 jobs, while the unemployment rate rose to 6.1%. The logical explanation is that this is a recovery from an unprecedented recession, driven not by tightening demand but by supply constraints.

Goldman Sachs notes that the reasons for this jump in inflation lie in travel and related services, where prices are recovering from depressed levels, as well as in some goods where the post-pandemic increase in demand has led to temporary shortages and difficulties.

Jason Furman of the Peterson Institute for International Economics also notes that employment in April is still 10 million jobs below its pre-pandemic trend, although the rate of job creation in February 2021 was the highest since 2001. .here. This again points to a lasting shock in labor supply after the pandemic. The unprecedented shock inevitably complicates the interpretation of data and economic forecasts.

This uncertainty also applies to raw material prices. They have bounced, but they are not so high by historical standards and are well below past peaks.

Meanwhile, inflation expectations (the difference between the yield on conventional and inflation-indexed US government securities) have risen sharply, albeit still to only 2.5% per year for a period of 10 years. Bloomberg’s John Otters notes that consumer forecasts and professional forecasts have also risen, with the former expecting nearly 6% inflation next year and the latter 3%.

It would be fair to conclude that inflation expectations are rising. But at current levels, they will not worry the Federal Reserve as much, because, as its chairman, Jay Powell, said last August, “we will strive to achieve inflation that averages 2%.” Therefore, after periods when inflation has been below 2%, appropriate monetary policy is likely to aim to achieve inflation moderately above 2% for some time. “As inflation has been below the target cumulatively by 5 percentage points since 2007, this may justify, say, 3% inflation for five years before returning to 2%.

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