MNI INTERVIEW: Virus and Jobs May Restrain Prices-Fed's Wright

Minneapolis Fed Research Director Mark Wright told an MNI webinar Wednesday a recent jump in inflation is likely temporary and the major risks facing the U.S. economy come instead from the failure to reach herd immunity or generate enough employment to accommodate some 10 million workers still out of a job.

"We have to trade off little misses on the upside of inflation because of the fact that we are still a long long way from full employment, and a little bit of higher inflation is not a huge price to pay for getting those people back to work," Wright said. "Given we are so far away from full employment I think it's still going to be a tendency to want to see the labor market improve."

Policy makers must balance this backdrop against an inflation overshoot that so far appears to be transitory, Wright said. He echoed Fed Chair Jerome Powell's view that it's too soon to think about tapering QE and any changes will be slow and signaled well in advance.

Future CPI reports will appear elevated because of comparisons to last year's weakness but the monthly figures will likely settle down soon as supply issues are resolved to confirm that that pressures are temporary, Wright said, following a surprisingly strong gain of 4.2% in the year to April. Bond market trading, surveys of inflation expectations and wage gains are in line with the Fed's goals, though officials are keeping a close eye on any troubling upticks, he said.

"We're trying to make sure we see through the noise," he said. "We've been on the low side of inflation for quite some time, and hopefully that will stick with people."

Comparisons to inflation seen in decades past aren't that helpful because of major changes since then on global supply chains, improved Fed credibility, lower inflation expectations, and weak goods pricing power before the pandemic, he said.

HERD IMMUNITY IS ELUSIVE

The job market should continue to gather strength though "we are a long way from where we think full employment should be," Wright said.

"We will see more strength in payrolls coming through, particularly as we move beyond the high-risk stages of the pandemic, as people get more vaccinated, and also as unemployment insurance benefits expire and as more jobs are opening up," he said.

The pandemic can't be overlooked as a major driver of the recovery, and not all the news is good, especially in poorer nations struggling with vaccinations, he said.

"The slowdown in the pace of vaccinations is making it seem more and more likely that we will not get to herd immunity in the United States," Wright said. "This virus is going to be with us for a long time."