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Yellen says inflation could reach 3% this year as recovery continues


WASHINGTON - Treasury Secretary Janet Yellen said Saturday that inflation could climb as high as 3% this year as the economy recovers from the depths of the covid recession.

For months, the White House and Federal Reserve have expected prices to rise as consumer demand rebounds, supply chains struggle to catch up and Biden's $1.9 trillion stimulus package infuses through the economy.

Yellen, Fed Chair Jerome Powell and other top policymakers insist the price pops are temporary and that the current uptick doesn't reflect a dangerously persistent new trend.

Still, Saturday appeared to be the first time the Biden administration projected what inflation could be through 2021.

"We have in recent months seen some inflation, and we -- at least on a year-over-year basis -- will continue, I believe through the rest of the year, to see higher inflation rates, maybe around 3 percent," Yellen said following a meeting of G-7 finance ministers in London. "But I personally believe that this represents transitory factors."

The Fed, which is charged with keeping prices stable and employment low, strives for a 2% annual inflation target. But the central bank has sent a clear message that it will not rush to combat inflation and raise interest rates until there has been substantial progress in the labor market. The economy is still down 7.5 million jobs since the pandemic took hold.

The Fed's commitment will be tested depending on how long prices continue to climb - and how high they go. Prices were up by 3.6% in April compared with a year ago.

Powell and others give a few reasons for why inflation is on the upswing, and why the Fed isn't worried about bringing it down too soon. Consumer demand for goods and services - from airline tickets to restaurant reservations - is rebounding as people unleash pent-up savings. Meanwhile, the supply side of the equation is taking longer to pick up. Those bottlenecks are expected to ease as factories ramp back up to full capacity and workers come back on the payrolls. But it won't happen right away.

Economists also expect inflation figures to taper off in the year to come, as the super-low readings from the pandemic's early days shift out of the calculation.

Meanwhile, many Republican lawmakers and some prominent economists warn that steadily rising inflation is cause for alarm. Among the most vocal Democrats on the issue is Lawrence H. Summers, a treasury secretary under President Bill Clinton and top economic adviser to President Barack Obama. Late last month, Biden privately called Summers to talk about Summers' concerns around overheating the economy.

Interest rate policy falls squarely to the Fed, and the central bank's independence is supposed to cushion it from political influence in Washington. For now, though, the administration and Fed are aligned on letting the economy run hot and emphasizing that the recovery still has a long way to go.

"We will watch this very carefully," Yellen said. "I don't want to say this is 'mind absolutely made up and closed.' We'll watch this very carefully, keep an eye on it and try to address issues that arise if it turns out to be necessary."

Published : June 06, 2021

By : The Washington Post · Rachel Siegel