Inflation is cooling off, says Fed Vice Chair Lael Brainard

Federal Reserve Vice Chair Lael Brainard noted on Thursday that recent reports show that high inflation in the United States is easing and suggested that the acceleration in prices may cool off without causing significant job losses.

Speaking in Chicago, Brainard outlined a more bullish outlook for inflation than some Fed speakers have in recent days. “Inflation has come down in recent months from very high levels,” he said, pointing to a drop in energy prices from a spike last summer.

At the same time, Brainard warned that inflation remains high and said the Fed would have to keep interest rates high “for some time” to slow price growth. He did not explicitly indicate whether he would support a quarter or a half point rate hike at the next Fed meeting Jan. 31-Feb. 2. one.

The Consumer Price Index rose 7.1% in the last 12 monthsthe Labor Department said last week, a sharp drop from 7.8% the previous month and the lowest annual rate of inflation since December 2021.

Why inflation is declining

Even so, Brainard, an influential voice in politics close to Chairman Jerome Powell, pointed to several trends that she said would likely lower inflation in the coming months.

The cost of goods such as cars, furniture and clothing have fallen, along with energy prices, he said. There are signs that the job market is cooling off, including a drop in the average work week, which could signal smaller wage increases. Although a higher wage is good for workers, it can drive inflation if companies charge more to make up for rising labor costs.

And for the most part, Americans still expect inflation to subside in the coming years, Brainard noted. That is an important measure because if people assume that prices will continue to rise, they will alter their behavior by accelerating their purchases before prices continue to rise. They may also push for higher wages to offset rising costs, thus worsening inflation.

Wage growth does not drive inflation

In particular, Brainard pushed back against the fact that rising wages for workers during the pandemic are driving inflation. “It appears that workers in lower-wage sectors who saw high pandemic layoffs initially and benefited from job change later as companies rushed to hire have seen wage gains in real terms,” ​​he said.

However, Shed added, “gains among lower-wage workers were more than offset by declines in real wages among middle- and high-wage workers in the context of a broader compression in the distribution of real wages.” .

All of those factors, Brainard said, “may provide some reassurance that we’re not currently experiencing a 1970s-style wage-price spiral.”

Fed officials are faced with a series of increasingly difficult and high-stakes decisions. After a series of big rate hikes last year, the central bank raised its benchmark interest rate closer to the level that officials believe will finally control inflation. That level is now the highest in 15 years: 4.25% to 4.5%.

At the same time, the Fed’s benchmark rate is also approaching levels that could prove to be higher than necessary to defeat high inflation, a miscalculation that would likely send the economy into recession.

Signs of a slowdown

Numerous signs show that key areas of the economy are weakening. The housing market has been severely damaged by higher mortgage rates. This week, a report on retail sales showed Americans cut spending last month, though part of the decline reflected lower prices for cars, gasoline and other goods. Manufacturing production fell. And surveys of service companies and factories earlier this month pointed to a reduction in production.

At the same time, other Fed officials this week have taken a hard line on inflation, emphasizing that they still support raising the central bank’s benchmark rate above 5%. Some officials are in favor of a full percentage point of additional fee increases.

“We’re not at 5% yet, we’re not above 5% yet, which I think will be necessary given my projections for the economy,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said Tuesday. in an interview with The Associated Press.

The combination of even higher rates and gloomy economic data helped plunge financial markets on Wednesday, with smaller declines continuing on Thursday.

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