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Fed's Powell downplays soaring consumer prices at House hearing

The largest jump in U.S. consumer prices in nearly 13 years will not upend the post-pandemic recovery nor will it alter monetary policy, at least in the near term, Federal Reserve Chairman Jerome Powell told a House committee July 14.

At a House Financial Services hearing, Republicans criticized Powell for ignoring the impact of rising prices for everything from groceries to gasoline as the Fed pressed forward with its commitment to near-zero rates and $120 billion in monthly bond purchases.

"Inflation is a tax hike on everyday consumers and small businesses," said Rep. Andy Barr, R-Ky., who called the latest Consumer Price Index data "grim."

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On July 13, the U.S. Labor Department reported that the CPI jumped 5.4% from June 2020 to June 2021, the largest increase since August 2008.

Powell downplayed this jump as a temporary boost caused by "base effects" from the severe price decline from the spring of 2020 when strict lockdown measures were in place; strong demand in sectors plagued by production bottlenecks, such as automakers facing semiconductor shortages; and rising demand for services hardest hit by the pandemic, such as airlines and hotels.

"Inflation has increased notably and will likely remain elevated in coming months before moderating," Powell said.

Still, Powell said this inflation increase was "in a range that is broadly consistent with the [rate-setting Federal Open Market Committee's] longer-run inflation goal" of inflation expectations anchored at 2%, and he repeated his claim that inflation increases were likely transitory.

"It should pass," he said. "We should look at this as temporary."

Powell said the Fed was continuing to monitor inflation data and its impacts, but he gave no indication of what level it would need to reach nor how long inflation would need to run hot before the Fed would alter its dovish monetary policy.

"It will depend on the path of the economy," he said.

In a July 14 note, Tom Essaye, a trader and founder of financial research firm The Sevens Report, said that while inflation is running hotter than the Fed's 2% target, the spike appears to be temporary. For example, about half of the increase in core CPI, which excludes food and energy prices, in June was due to a 10% jump in used car prices.

"Inflation statistics remain very high, and so far, there are few signs of inflation pressures receding," Essaye wrote. "But the details also imply that the bulk of this inflation spike is due to temporary factors related to the global supply chain and the global reopening. As long as that's the case, then the market will give this inflation data the benefit of the doubt, despite the big headlines."

Still, Michael Hewson, chief market analyst at CMC Markets, argued that some price increases, including food prices, which rose 2.4% from June 2020 to June 2021, present "more worry" on the state of the recovery as wage inflation and core prices could also be driven up faster than expected.

"This remains a worry particularly when we don't really know what sort of timeline is considered transitory as far as central bankers are concerned," Hewson wrote in a July 14 note. "After all, on a long enough timeline everything is transitory, and policymakers' opaqueness on this does raise concerns that they are merely playing a waiting game, and hoping that prices slow of their own accord."

Labor pains

Along with inflation, the Fed has a "long way to go," on its labor market goals, Powell said.

US employers added 1.7 million workers from April through June, but the unemployment rate remains at 5.9%, a percentage that does not accurately reflect the number of workers not participating in the labor market, Powell said.

Powell said the Fed is still committed to reaching pre-pandemic unemployment levels of about 3.5%.

"It's a long road back … but I think there's every reason to think we can get back to that level," Powell said, later adding that he expected unemployment numbers to normalize in about six months.

Powell is scheduled to testify before the Senate Banking Committee on July 15.