Supply-driven spike in U.S. inflation creates problems for Fed’s soft landing wish

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Supply-side factors, including a tight labor market, production constraints and shipping delays triggered about a year after COVID-19 scared the world in February 2020, have since played a significant role in high consumer price inflation over several decades that is a misspelling for the Federal Reserve’s mission to dampen inflationary pressures while avoiding a recession.

Note that a deflationary shock, or a sharp drop in prices, occurred for a brief period after the onset of the pandemic due to a drop in demand factors. It wasn’t until March 2021 – around the same time the stimulative US bailout was enacted – that inflation started to spike due to a brief spike in demand factors. Supply factors, however, started to emerge in April 2021 and have remained elevated ever since.

Nonetheless, the recent spike in inflation levels has largely been a supply issue. Specifically, supply factors explain about half of the inflation surge, while demand factors are responsible for about a third, said Adam Hale Shapiro, vice chairman of the Fed’s economic research department. of San Francisco, in a recent study. reportadding that the rest resulted from unclear factors.

Overall, high inflation is made up of almost two-thirds of factors other than demand.

Shapiro’s assessment is based on the impact of supply and demand factors on 12-month personal consumption expenditure (“PCE”), the Fed’s preferred gauge of inflation. Supply-driven inflation has accelerated more recently due to disruptions in food and energy supplies, as shown in the chart below.

As for the Federal Reserve, it is struggling to reduce inflationary pressures which are mainly fueled by supply factors. The Fed’s tools are aimed at tempering demand, Fed Chairman Jerome Powell said. “So whether we can execute a soft landing or not, it may actually depend on factors that we don’t control,” he said in a recent interview.

In other words, the Fed’s ability to tighten financial conditions via rate hikes and balance sheet liquidation – as is happening now – is helping to reduce demand. But it certainly has no tools to directly address supply chain disruptions triggered by the pandemic as well as Russia’s war in Ukraine. With inflation still high, the central bank is pressured to pursue a hawkish monetary policy. The Federal Open Market Committee, the decision-making arm of the Fed, has already raised its key rate by 175 basis points in the past year from ultra-easy levels, and it has begun to reduce its balance sheet by almost 9 $000,000 in early June.

Earlier (June 15), economic analyst Komal Sri-Kumar said there was no prospect of a soft landing and that the Fed’s Powell lacked “judgment”.

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