Federal Open Market Committee members say “transitory” inflation could last into next year, longer than previously anticipated. That trend, however, also brings possible benefits — a strong demand for goods and a competitive labor market, according to the FOMC.
In comments made during an early November meeting, FOMC members noted that the near-term inflation outlook has been revised upward, as consumer food and energy prices have increased faster than anticipated and production bottlenecks and recent wage gains place more upward pricing pressures than expected. Total Personal Consumer Expenditure price inflation was 4.4 percent over the 12 months ending in September, and core PCE price inflation, which excludes changes in many consumer food prices and consumer energy prices, was 3.6 percent over that same time.
FOMC members continue anticipating that the inflation rate will significantly decrease next year as demand and supply imbalances lessen. “Uncertainty regarding this assessment has increased,” the American Bankers Association said. “Some members also expressed concern that an upsurge in Covid-19 cases during the coming winter or an emergence of new virus strains would damp economic activity and intensify price pressures.”
Consumer price inflation in September — the 12-month percentage change in the PCE price index — was elevated. Residential investment dropped again in the third quarter due to shortages in construction supplies and tight labor market and land markets hampering construction activity. Commercial and industrial loans declined in the third quarter amid forgiveness of Paycheck Protection Program loans.
The FOMC is tapering its support for the economy as more people become vaccinated against Covid-19 and those inflationary pressures remain, reducing its monthly pace of bond purchases from $120 billion to $105 billion. The committee still expects to continue its massive support for the economy until maximum employment is reached and long-term inflation remains “moderately above” 2 percent. “Similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook,” the FOMC stated.
Banks continue to have adequate capital, stable funding and quality liquid assets, the FOMC noted in early November. Continued strong earnings drove an increase in equity prices, with private firms posting profits near historical highs. Though U.S. real gross domestic product growth slowed considerably in the third quarter due to waning fiscal stimulus measures, surging Covid-19 cases and a drop in motor vehicle prices, labor market conditions continued improving in September. Survey-based indicators suggested more financial optimism from most small business owners. Though loan originations to small businesses slightly dropped, a recent report suggested that was due to weak demand, particularly for small firms.