MNI INTERVIEW: Inflation Fears Premature-- Boston Fed Staffer

Rising worries on Wall Street about the prospect of runaway inflation are so far misplaced because there is still ample slack in the economy according to a wide range of key metrics, though supply chain disruptions bear watching, Boston Fed Senior Economist Viacheslav Sheremirov told MNI.

"Concerns about inflation rising persistently above the target are still premature, in my view," he said in an email interview. "Output is still significantly below its pre-pandemic level, labor markets have room to improve further, inflation readings are low, and both survey and market-based inflation expectations are relatively stable."

Sheremirov said there is good reason to expect a strong growth rebound as the economy emerges from the Covid recession. But the economy has plenty of room to absorb the new demand.

"Temporary excess demand concentrated in a few sectors, such as food, travel, and recreation services, is unlikely to trigger significant and persistent inflationary pressures by itself," he said.

The economy created nearly 1 million new jobs last month but remains 8.4 million short of pre-pandemic levels. Inflation as measured by the Fed's preferred personal consumption expenditures index rose to 1.6% in February but is still below its 2% target, which it now intends to overshoot for a period to make up for past misses.

SHIFTING DEBATE

Sheremirov's comments come as the debate shifts among both former and current Fed officials away from talk of downside risks toward the prospect of persistently higher prices as the rollout of vaccines exceeds early expectations and as fiscal policy becomes increasingly robust.

Prices on imported goods have been rising, but similar rises in the past did not have a major effect on core inflation measures, Sheremirov said.

"Inflationary pressures may become somewhat more persistent if domestic demand rises substantially in most consumption categories while global supply chains continue to experience significant disruptions—for instance, due to uneven access to vaccinations across the world," he said.

Boston Fed President Eric Rosengren told MNI in September the Fed's framework shift implied the acceptance of some additional risk to financial stability from a prolonged period of rock-bottom interest rates in order to make up for past undershooting of the central bank's 2% target, which it missed for most of the post-Great Recession recovery.

ONE-TIME RECALIBRATION

Persistent inflation would have to take place across sectors while temporary spikes are more likely to be industry-specific, Sheremirov said.

"Higher inflation readings for a month or two would not necessarily indicate persistent inflationary pressures, as they could reflect a one-time recalibration of prices following the pandemic," he said.

Other key metrics to watch include wage dynamics as well as inflation expectations of consumers and investors.

"Inflation expectations of consumers and of professional forecasters have been relatively stable so far," he said "And while we have seen some upward movement in the five-year and five-year-forward break-even inflation rates, they are still at levels seen not so long ago and, at least then, inflation remained low and stable."

Sheremirov said base effects that may artificially boost annual inflation readings for a couple of months because of comparisons with the worst of the initial pandemic months can be easily worked around from a measurement perspective. Economists can look at changes over a shorter period that does not include March and April 2020, for instance.

"Core PCE inflation over nine months is currently slightly elevated, but the corresponding six-month measure is less so. The market-based PCE measures, which exclude imputed prices, also suggest little inflationary pressures," he said.