MNI: Fed Rosengren On Guard Against Inflation Structural Shift

Federal Reserve Bank of Boston President Eric Rosengren said Wednesday price pressures will accelerate this spring before normalizing near 2%, but warned that policymakers will need to keep a close eye on wages to see if structural changes boost inflation more permanently.

"Despite the improved public health outlook and the expansion in economic activity, it is very important to note that significant slack remains in the economy," said Rosengren in prepared remarks at Boston College. Although fiscal policy has been "unusually stimulative," monetary policy will remain highly accommodative waiting for realized, rather than expected, outcomes, he said.

The Boston Fed chief said "a number of temporary factors" including base effects, a pickup in oil prices, pent-up demand, supply chain bottlenecks, and delays in unloading at ports should make measured inflation accelerate this spring, but the rate of price increases is likely to prove temporary.

The underlying rate of inflation and inflation expectations look to be stable, and "compensation and wages have yet to expand at rates that would drive accelerating inflation, and the most likely outcome remains that inflation will normalize close to 2 percent."

STRUCTURAL CHANGES

The debate about whether trend inflation will rise as the economy strongly recovers will not be resolved until next year, Rosengren said.

"It will be important to differentiate between temporary and longer-term trends," he said, and "policymakers will need to be vigilant in making sure that the post-pandemic economic environment does not bring structural changes that would lead to wages and prices being more responsive to tightening labor market conditions."

While wage increases would begin to reflect higher expectations, indicators such as the employment cost index controls for composition changes in the workforce and "to date is not showing much change," he said. Firms have also been impacted by social distancing, he said.

"It will be particularly important to see whether wages and prices continue to be relatively unresponsive to the tightening of the labor market," said Rosengren.