On Controlling Inflation

Last week, comments by U.S. Federal Reserve Chair Jerome H. Powell, at a conference of global central bankers, included:  

• “Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. 

• “It is true that the current high inflation is a global phenomenon, and that many economies around the world face inflation as high or higher than seen here in the United States. It is also true, in my view, that the current high inflation in the United States is the product of strong demand and constrained supply ….  There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job.

• “As former Chairman Paul Volcker put it at the height of the Great Inflation in 1979, 'Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations.'

• “When inflation is persistently high, households and businesses must pay close attention and incorporate inflation into their economic decisions.

• “We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent."

OUR TAKE

• As the Federal Reserve increases interest rates to lower U.S. inflation, which is currently at 8.5%, market volatility will likely persist.

• Factors contributing to inflation, both in the U.S. and globally, include: 1) volatile energy prices, 2) government stimulus concerns, 3) global supply chain disruptions, 4) Russia/Ukraine conflict dynamics.

• Taming global inflation is a complex process that will likely extend through 2023.