The strong demand coupled with the shortage of selected goods and services one year ago drove up inflation. Fed officials expected it to eventually calm down as supply chains recover.
But over the past six months, officials have become more concerned about inflation exceeding the central bank’s 2% target for much longer than they previously expected – even after any reversal of last year’s steep price increases for items such as used cars – due to signs that labor markets are too tight and that Price pressures are widening to include more labor-intensive services.
Consumer prices rose 6.6% in March from a year earlier, according to the Federal Reserve’s preferred measure of inflation, the Commerce Department’s PCE price index, to a four-decade high. Core consumer prices, which exclude volatile food and energy, rose 5.2%, down from an increase of 5.3% in February.
Among the questions facing Fed officials: Where do they think inflation is likely to stabilize if the growth rate slows later this year, as many economists and Fed officials have predicted? And second, what level of inflation would be unacceptably higher than their 2% target that would justify pushing prices beyond the neutral rate estimated between 2% and 3% when core inflation is around 2%?
Chicago Fed President Charles Evans said last month that even after accounting for expected declines in the prices of some consumer goods that rose sharply last year, he believes inflation will be around 3% or 3.5% by the end of the year.
“That’s not what we want,” he said, noting that he would support a rate hike if that was the case. On the other hand, if inflation drops to 2.5%, “we have more things to think about,” including whether interest rate increases should be paused.
Peter Huber, head of global economic research at Deutsche Bank, sees the Federal Reserve raising its benchmark rate above 5% over the coming years because it does not expect inflation to fall below 4%. This is expected to cause a recession.
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