Customers shop for groceries at a supermarket in Chicago, Illinois on June 10, 2021.

Scott Olson | Getty Images

Under normal circumstances, the recent flood of high inflation would be of great concern.

But in the current context of the Covid era, they were in some areas the confirmation that the inflation picture does little more than follow the script and rise due to one-off bottlenecks and the product of a biased comparison with a period a year ago a large part of the US economy in shutdown mode.

There was another sharp spike in May, according to the scale most cited by Fed officials.

The core consumer spending index – excluding food and energy bills – rose 3.4% year-over-year, in line with Wall Street expectations, but also the largest increase since April 1992.

Markets took little notice of Friday’s PCE levels, which largely drove stocks higher and government bond yields rose only slightly.

This was mainly due to the fact that although the inflation data suggested comparisons with the runaway scenario of the 1970s, the numbers are, at least for the time being, on the side of those who expect the trend to subside and then stabilize at a lower level.

“It was right in the strike zone,” said Mark Zandi, chief economist at Moody’s Analytics, of the Commerce Department’s release on Friday. The PCE level is “consistent with the idea that the rise in inflation will be temporary, that it is related to the reopening of the economy and some of the disruptions resulting from this rapid reopening”.

In the short term, at least, the idea that inflation will eventually subside is cold comfort to those who have coped with the higher costs.

Everything from plane tickets to hotel stays to the cost of buying a home has increased and only occasionally shows signs of subsiding. A separate inflation indicator, the consumer price index, rose 5% year over year in May, while the producer price index rose 6.6%, the fastest increase on record.

Widespread price increases

Consumers pay higher costs for almost everything.

According to the Energy Information Administration, gasoline is up 20% nationwide from pre-pandemic levels and 46% year over year. In the grocery store, beef and pork prices are rising, with bacon up 18.7% year over year, ham being nearly 8% higher and milk prices up about 9%, according to the Bureau of Labor Statistics.

This pressure has caught the attention of Fed officials, who are closely monitoring inflation to see if and when to abandon the ultra-light monetary policy moves they took during the pandemic.

Customers shop for meat at a supermarket in Chicago, Illinois on June 10, 2021. Inflation rose 5% in the twelve month period ended May, the largest increase since August 2008. Food prices rose 2.2% over the same period.

Scott Olson | Getty Images

Atlanta Fed President Raphael Bostic said last week that inflationary pressures could be stronger and more permanent than previously thought, and his St. Louis counterpart James Bullard also said he was increasingly concerned.

“A new risk is that as the reopening process continues, inflation will surprise further up, beyond what is needed to simply make up for past failures on the low side,” Bullard said in a statement on Thursday.

“Policymakers will have to take this new risk into account in the months and quarters to come,” he added.

The Fed is happy to keep inflation at around 2%, but said it is willing to tolerate even higher levels if the longer-term average stays at that level and the economy has not yet reached full employment.

However, longer readings around the levels of the past two months – the core PCE rose 3.1% in April – could force the Fed to act. As of this writing, officials have begun discussing whether to reduce the $ 120 billion minimum monthly bond purchases, although they are still unwilling to talk about rate hikes until at least 2023.

“It’s time to talk about how we could reduce asset purchases,” said San Francisco Fed President Mary Daly on a media call. “Talking about tariff changes at the moment isn’t even on the table.”

However, talking about inflation is on the table for many in American companies. Company CEOs spent considerable time on conference calls this quarter explaining how much inflation has affected their businesses.

Darden restaurant chain owner, which owns Olive Garden as one of its properties, said a few days ago that its outlook for 2022 was a 3% inflation blow, with dairy and seafood costs expected to rise in the high single digits and chicken and wheat in the mid-range single-digit hits.

A few weeks ago, Campbell Soup executives also said that transportation costs are affecting their bottom line, despite expecting to be able to handle the situation.

“We faced a significant inflationary environment and short-term increases in supply chain costs for the quarter,” said Mark Clouse, CEO of Campbell. “We expected the vast majority of these drivers, but in certain areas the pressures have increased, particularly those related to inflation and some of the transition costs from the Covid-19 environment. We are confident that we can address these issues and have plans and “Prices are already set by the time we close the fiscal year and enter the 2022 fiscal year.”

Important political and economic implications

The risk of inflation could not be higher.

If the current trend doesn’t follow the script, the staggering economic growth of the past year could quickly be diverted. At the same time, the Biden administration expects inflation to remain low, with Treasury Secretary Janet Yellen repeatedly saying that the current high deficit spending is made affordable by the low interest rate environment.

“We are focused on making sure that some of these bottlenecks that have emerged are removed in the short term and that we can move to a strong type of full employment and post-pandemic economy as soon as possible,” said a senior White House official. “Ultimately, that will mean a rapidly growing economy with a larger workforce over time.”

The official, who spoke on condition of anonymity, said that market prices are responding to the idea that inflation will ease and that the current round is temporary and large numbers are inflated by base effects.

Boston Fed President Eric Rosengren said in a presentation that the area of ​​rising inflation that worries him most is real estate, with prices rising “with a steepness not unlike what we saw over the period Experienced 2005 to 2007. … We were worried about house prices in a boom-bust scenario. “

Overall, however, the expectation that inflation will remain at the current level is “not a particularly good forecast”.

“We may see it this year, but it will be temporary,” said Rosengren. “I think that’s more relevant when you look at next year.”

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