Federal Reserve Chair Jerome H. Powell said the inflation outlook had deteriorated significantly even before the adverse economic impacts of Russia’s invasion of Ukraine, defying forecasters’ predictions.
Speaking Monday at the National Association for Business Economics’ annual conference in Washington, Powell said forecasters — including those at the U.S. central bank — “widely underestimated” the severity and persistence of supply-chain challenges created by the pandemic and accompanying shutdowns. He said these developments, when combined with strong demand, especially for durable goods, “produced surprisingly high inflation.”
Fed forecasters and others had been expecting inflation to cool in the second half of 2021, as the economy started getting back to normal after vaccines became widely available, Powell said.
For example, in June of last year, the central bank predicted that 2021 inflation would be below 4 percent. Instead, inflation came in at 5.5 percent.
“[C]ontrary to expectations, COVID has not gone away with the arrival of vaccines,” he said.
The Bureau of Labor Statistics reported the Consumer Price Index in February rose 7.9 percent over the past 12 months, the fastest pace since 1982.
Powell warned that the economy now faces new challenges, including more COVID-19-related supply disruptions from China and the war in Ukraine.
“Russia is one of the world’s largest producers of commodities, and Ukraine is a key producer of several commodities as well, including wheat and neon, which is used in the production of computer chips,” he said. “There is no recent experience with significant market disruption across such a broad range of commodities.”
The chairman said that in addition to the direct effects from higher global oil and commodity prices, Russia’s invasion and related events are likely to hamper economic activity abroad and further disrupt supply chains, which would create spillovers to the U.S. economy.
“The added near-term upward pressure from the invasion of Ukraine on inflation from energy, food and other commodities comes at a time of already too high inflation,” he said.
The Fed last week said it would hike interest rates for the first time since 2018 in an effort to combat sharp price increases and to eventually bring inflation down to 2 percent. Powell said Monday that if the Fed concludes it is appropriate to move more aggressively by raising the federal funds interest rate by more than 25 basis points, “we will do so.”
The chairman cautioned “that no one expects that bringing about a soft landing will be straightforward in the current context — very little is straightforward in the current context.”