‘Headline’ inflation may heat up along with economy, but long-term will remain low, Fed governor asserts

As the economy recovers, there is a chance for at least “headline” inflation to heat up – but the longer term continues to signal a low chance for long-term inflation pressures, a Federal Reserve Board member said Wednesday.

In remarks via webcast to The Colorado Forum in Denver, Federal Reserve Board Gov. Michelle W. Bowman said she expects “headline inflation measures” (for example, the cost to purchase a fixed basket of goods, calculated in the Consumer Price Index (CPI)), to move above the Fed’s long-run target of 2%.

“A main reason I expect this outcome is simply the fact that the very low inflation readings during last spring’s deep economic contraction will drop from the usual calculation of 12-month price changes,” she said. “But in addition, the unusually rapid rebound in economic activity that we’ve seen, along with the pandemic-driven shift towards goods purchases, has led to supply-chain bottlenecks in a number of areas, which in turn have pushed up prices for many goods.”

She pointed to the example of semiconductor producers’ need to “alter the mix” of production to meet demands of high tech and automotive industries.

“Although I expect these upward price pressures to ease after the temporary supply bottlenecks are resolved, the exact timing of that dynamic is uncertain,” she said. “If the supply bottlenecks prove to be more long-lasting than currently expected, I will adjust my views on the inflation outlook accordingly.”

However, Bowman said, the risk that inflation remains persistently above the Fed’s long-run target of 2% “still appears small,” at least at this point.

Gov. Michelle W. Bowman: The Economic Outlook and Implications for Monetary Policy