MNI: Supply Bottlenecks Lasting Longer Than Expected-Sintra

Inflation expectations appear stable but warrant careful monitoring as lingering supply constraints worsen price increases associated with the reopening of economies, the heads of the Federal Reserve, ECB and BOJ said Wednesday.

"The current inflation spike is really a consequence of supply constraints meeting very strong demand and that's all associated with the reopening of the economy, which is a process that has a beginning, middle and end," Fed Chair Jay Powell told the ECB's Sintra conference.

"If it lasts long enough, will it start changing the way people think about inflation? We do not see evidence of that now. If we were to see sustained higher inflation and that becomes a concern we will certainly use our tools to make sure inflation is consistent with our goal."

Powell and his counterparts at the ECB, BOE and Bank of Japan agreed supply bottlenecks were dragging on for longer than expected with little certainty as to when they might abate. That might cause "transitory" inflation to persist.

AVOIDING SECOND ROUND EFFECTS

"We monitor very carefully how lasting transitory price increases could eventually have, and in particular we're very attentive to inflation expectations and making sure they're well anchored," ECB president Christine Lagarde said.

So far, they've risen about 50 bps, "still at a distance to our 2% target." Further, the ECB is "not seeing widespread contamination of those price increases into wages that would produce a second-round effect that we would be very attentive to."

"The evolution of expectations, that is where we have to be very focused in terms of policy," BOE Governor Andrew Bailey said. "Monetary policy can't solve supply-side shocks," he said. "What we have to do is focus on the potential second-round effects from those shortages."