Inflation could quickly rise once more Americans are vaccinated and the U.S. central bank should monitor price signals closely, Kansas City Fed President Esther George said Thursday.
“It is worth recognizing that overall inflation could firm up quickly post-vaccination as demand for hard-hit sectors recovers,” George said, in a speech to a conference sponsored by the Farm Journal.
Fed Chairman Jerome Powell told Congress this week that inflation was “soft.”
The Fed’s favorite inflation measure, the personal consumption expenditure price index, has been below the Fed’s target of 2% long-term inflation for most of the last decade. Overall PCE inflation was running at 1.3% over the year ending in December.
George said aggregate inflation measures don’t mean so much during the pandemic because prices have been moving dramatically both higher and lower.
“While some prices are down, other sectors, particularly durable goods, are recording their fastest price increases in decades,” George said.
Some households would be surprised to hear that overall inflation is subdued, she noted.
“While we would like for overall inflation to reveal the trend in prices across the entire economy, a wide dispersion in inflation across individual sectors makes overall inflation less informative for that trend,” George said.
In a separate talk at Georgia State University, St. Louis Fed President James Bullard said all of the theories that economists rely on to gauge inflation are pointing to higher inflation this year. Some economists look at money growth, while another camp focuses on the federal deficit, and still others consider the economy’s growth rate, he noted.
The Kansas City Fed president said it was too early to discuss pulling back on the central bank’s easy policy stance. The notable rise in longer-term interest rates does not warrant a monetary policy response, she added.
“Much of this increase likely reflects growing optimism in the strength of the recovery and could be viewed as an encouraging sign for increasing growth expectations,” George said.
“If this is indeed the reason that yields are increasing, they are unlikely to rise to the point of smothering the optimism that led to their increase in the first place, and measures of real yields remain deeply negative and only a touch off all-time lows,” she added.
Read More: Fed’s George says inflation could ‘firm up quickly’ after vaccinations