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MNI INTERVIEW(RPT): Omicron Prolongs High Prices-Fed's Garriga
(Repeats article first published on Feb. 3)
The Omicron variant of Covid is likely to prolong the record surge in U.S. inflation this year, with the headline PCE measure likely to end 2022 several tenths of a percent higher than forecast by the FOMC, Federal Reserve Bank of St. Louis research director Carlos Garriga said in an interview.
Global supply chain frictions are continuing for longer than expected as Omicron worsens staff shortages and shuts down production and transport abroad. That will likely keep prices higher as U.S. businesses try to keep up with robust demand.
"Omicron has really pushed back how quickly we expected these things to resolve," Garriga said. "The situation is very fluid and could change quickly, but we have built in a few more months as a result of what we've seen in the last few weeks."
Base effects and Fed tightening should see price rises starting to lose steam in the second half, but PCE inflation could finish the year closer to 3% than to the 2.6% in the FOMC’s December forecast, he said.
"Last year, the notion that inflation was going to wane or was going to be transitory was proven wrong, and it remained more elevated. This year we’re facing a similar junction," Garriga said. "The disruptions that might be occurring right now that might have impact on the supply chain in the latter part of the first half of the year could make things more persistent."
UNEMPLOYMENT TO FALL
Garriga expects the U.S. economy to show resilience in the face of Omicron, despite a temporary slowdown in hiring and dent in economic activity in the first weeks of the year.
The wave of cases is "going to have a little bit of impact on employment, but the decline in unemployment has been the key trend for the last 18 months," he said. Strong demand for workers saw the U.S. jobless rate drop to 3.9% in December from 6.7% a year earlier.
"It won't be crazy to think that the unemployment rate could fall to pre-pandemic levels and below 3.5%. We have one of the strongest labor markets we've seen in the last 30 years," he said.
BLS data last week showed employers spent 4% more on compensation last year, the biggest gain since 2001, but Garriga isn't convinced there's a wage-price spiral in the making. Productivity gains have been sizeable and could be feeding wage growth, rather than inflation.
"There have been wage increases across some sectors and wage decreases across other sectors. For a wage-price story, you would need to see it clearly throughout the economy broadly," he said. "Right now. I don't see a wage-price spiral, but we're monitoring very closely and this is a very fluid situation."
Staffing shortages remain a top issue across a diverse array of firms in the St. Louis Fed district, alongside concerns over the timing of supplier deliveries and pricing uncertainty.
It may take some time to sort out, Garriga said. On the one hand, businesses now have better protocols to deal with infected staff, with some even allowing Covid-positive employees to come to work if they're vaccinated.
On the other hand, a structural adjustment is taking place across the country as households reassess who works outside the home and businesses reconfigure for the post-Covid economy. Recent analysis from Garriga’s colleagues at the St. Louis Fed suggests prime-age workers who are neither employed nor actively looking for a job are staying out of the labor force due to family or other reasons unrelated to the economy or labor demand.
"Unemployment will continue to decrease. There are going to be better matches between firms and workers. But adjustments, potentially in labor force participation, is something that is very hard to predict in this environment."
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