Pent-up demand and supply constraints fuel US inflation
Published: 03:05 PM,May 29,2021 | EDITED : 07:05 PM,May 29,2021
20-Pent-up-US-inflation
WASHINGTON: US consumer prices surged in April, with a measure of underlying inflation blowing past the Federal Reserve’s 2 per cent target and posting its largest annual gain since 1992, because of pent-up demand and supply constraints as the economy reopens.
The strong inflation readings reported by the Commerce Department on Friday had been widely anticipated as the pandemic’s grip eases, thanks to vaccinations, and will have no impact on monetary policy. Fed Chair Jerome Powell has repeatedly stated that higher inflation will be transitory.
The US central bank slashed its benchmark overnight interest rate to near zero last year and is pumping money into the economy through monthly bond purchases. It has signalled it could tolerate higher inflation for some time to offset years in which inflation was lodged below its target, a flexible average.
The supply constraints largely reflect a shift in demand towards goods and away from services during the pandemic. A reversal is underway, with Americans flying to vacation destinations and staying at hotels among other activities. Year-on-year inflation is also accelerating as last spring’s weak readings drop from the calculation.
“Many goods are in short supply amid very strong demand and supply chain disruptions, and some services prices are up sharply as consumers start to go out again,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. “Shortages of labour in some industries are also contributing to higher prices. But many of these factors will prove transitory, and inflation will slow in the second half of 2021.”
Consumer prices as measured by the personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, increased 0.7 per cent last month amid strong gains in both goods and services. That was the biggest rise in the so-called core PCE price index since October 2001 and followed a 0.4-per cent gain in March.
— Reuters
The strong inflation readings reported by the Commerce Department on Friday had been widely anticipated as the pandemic’s grip eases, thanks to vaccinations, and will have no impact on monetary policy. Fed Chair Jerome Powell has repeatedly stated that higher inflation will be transitory.
The US central bank slashed its benchmark overnight interest rate to near zero last year and is pumping money into the economy through monthly bond purchases. It has signalled it could tolerate higher inflation for some time to offset years in which inflation was lodged below its target, a flexible average.
The supply constraints largely reflect a shift in demand towards goods and away from services during the pandemic. A reversal is underway, with Americans flying to vacation destinations and staying at hotels among other activities. Year-on-year inflation is also accelerating as last spring’s weak readings drop from the calculation.
“Many goods are in short supply amid very strong demand and supply chain disruptions, and some services prices are up sharply as consumers start to go out again,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. “Shortages of labour in some industries are also contributing to higher prices. But many of these factors will prove transitory, and inflation will slow in the second half of 2021.”
Consumer prices as measured by the personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, increased 0.7 per cent last month amid strong gains in both goods and services. That was the biggest rise in the so-called core PCE price index since October 2001 and followed a 0.4-per cent gain in March.
— Reuters