MNI INTERVIEW2: Fed's Mester Sees Upside Risk to Inflation

Cleveland Fed President Loretta Mester cautioned against concluding that U.S. inflation has peaked after CPI moderated for the first time in eight months in April, saying risks are still to the upside.

"I'm not convinced we’ve hit the peak," she said in an interview Monday. "The April report was more mixed. I want to see a string of these reports before I conclude that it's coming down. I haven’t seen compelling evidence that it's moved down."

Shelter inflation is up and takes a while to feed through to inflation measures, she said. The war in Ukraine and continued coronavirus lockdowns in China can leave supply chains kinked for longer, she said.

"I think there’s upside risks to inflation. We have to be particularly attuned to not wanting to declare victory too quickly," she said.

The evolution of consumer inflation is key to whether the Fed will need to speed up its interest rate increases by September and how far officials need to push policy into restrictive territory, she said. With rates headed above 2% by fall, she forecasts PCE inflation to end the year at 4.5% to 5% and take a couple years to fall back to target.

The PCE jumped 6.6% in the year to March while the more prominent consumer price index surged 8.3% in the year to April, both around 40-year highs.

'HEROIC' HIRING EFFORTS

Firms in the Cleveland Fed district had thought supply chain issues would ease this year, but "that's all been pushed out," Mester said. "Whenever one thing gets resolved, there seems to be another issue. People have been calling it whack-a-mole."

Meanwhile, employers are finding it incredibly difficult to find workers, even to the extent that some hesitate to invest in new capacity due to uncertainty on staffing.

"There's been heroic efforts to try to find workers and that includes pretty sizeable wage increases, and firms tell us they're questioning how much longer they can do this because at some point they're not going to be able to increase wages further," she said. "Those conditions are making it very hard to maintain a workforce. I don’t see right now that the wage increases we're seeing are sustainable."

Some firms have been pondering longer run changes to their supply chains to avoid such problems in the future, Mester said. A reversal of the decades-long trend of globalization could affect the inflation rate going forward, she said.

"I don’t think anyone can tell you today what that will look like," she said. But "as a policymaker, this experience makes you very attuned not only to the downside forces but potential upside forces, and that'll have to be incorporated into how we think about calibrating the economy as it emerges out of Covid."