Yellen, Kashkari say inflation transitory, caused by Covid-19

Covid-19 is causing the highest inflation rates in more than 30 years, Federal Reserve Bank of Minneapolis President Neel Kashkari and Treasury Secretary Janet Yellen said Sunday during separate appearances on CBS News’ “Face the Nation.” 

Sparked by boosts in consumer demand and ongoing supply shortages, year-over-year inflation was measured at 6.2 percent last month. That increase was especially evident in a 30 percent increase in energy prices, 28.1 percent jump in utilities costs, and 26.4 percent rise in used cars and trucks. Yellen said those jumps, however, must be viewed in context with the boost in consumer demand during the recent economic recovery. Those inflationary pressures should ease by the second half of 2022, depending on the progression of the virus, Yellen said. 

 “The pandemic has been calling the shots for the economy and for inflation, and if we want to get inflation down, I think continuing to make progress against the pandemic is the most important thing we can do,” Yellen said. Covid-19 cases are jumping in the Upper Midwest, Southwest and Northeast. As reported by the Minneapolis Star Tribune, waning immunity after early Covid-19 vaccinations is helping to prolong Minnesota’s latest pandemic wave. Kashkari and Yellen said high infection numbers will prolong the nation’s workforce shortage as potential workers continue to sit out over fears of contracting the virus. 

Kashkari said “somewhat higher” inflationary readings are expected over the next few months before core inflation begins tapering. To him, the Fed should not make many policy adjustments based on “transitory” inflation to prevent long-term inflation. “Those are real, and people are experiencing that pain right now, and so we take that very seriously, but I am optimistic that it should be temporary,” Kashkari added.  

The federal government has taken an aggressive approach during the pandemic. Several rounds of funding through the Paycheck Protection Program brought much liquidity into the financial market following the onset of stay-at-home orders and other action taken to prevent the spread of the virus increased unemployment to nearly 15 percent. In December 2020, the Federal Reserve Open Markets Committee increased its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month “until substantial further progress has been made toward its maximum employment and price stability goals.” The Federal Open Markets Committee earlier this month unanimously opted to reduce its monthly pace of bond purchases from $120 billion to $105 billion. The committee expects to continue its support for the economy until maximum employment is reached and long-term inflation remains “moderately above” 2 percent. Two percent inflation is not expected until 2024. Kashkari noted the Fed will receive more data on the demand and supply sides over the next nine months to better gauge where the economy is heading.  Unemployment is down to 4.6 percent. Yellen noted there are more job openings and fewer unemployed people. “We have a tight labor market, not a loose labor market,” she added. 

Kashkari said the government’s decision to spend hundreds of billions in stimulus dollars during Covid-19 ensured that the country’s economic recovery would be stronger and faster than the period after the Great Recession.