MNI:Supply Kinks Strain 'Transitory' Price Surge-Fed Economist

A string of higher-than-expected inflation readings, linked to supply chain disruptions with no clear end in sight, is testing the Federal Reserve's view that a surge in prices is transitory, current and former Fed staffers and advisers told MNI, even as top officials reaffirm their confidence that such pressures will subside.

Fed officials have acknowledged they underestimated post-Covid inflation pressures, and in June, policymakers bumped up their forecast for headline inflation to 3.4% this year and 2.1% next from 2.4% and 2.0%, respectively, in March. But even those estimates are now looking potentially conservative, MNI was told.

"The Fed's conundrum is that the supply chain issues themselves may last a while," said Glenn Hubbard, former head of the White House Council of Economic Advisers and an ex-adviser to the Federal Reserve Bank of New York.

The rapid spread of the Delta variant will further strain global trade, he added. "That's going to exacerbate inflation pressures, not weaken them on the supply side, so it doesn't make the situation any better."

Nicholas Sly, a Kansas City Fed economist who has studied shipping costs and inflation, told MNI he sees reason to believe there may be more pass-through of shipping costs to consumers than in the past.

HISTORIC SHOCK

"The shock that we're seeing in terms of congestion for shipping costs is certainly bigger than what we've seen historically and that's a reason to think the pass through to final consumers to inflation could be a little bit different and perhaps a bit larger this time around," Sly said in a recent interview.

In past research, he has found a 15% increase in shipping costs leads to a 0.10 pp rise in core PCE inflation after about one year. Covid is "a much bigger shock, it's lasted a little bit longer, and it's coming at a time when firms might have a little bit less margin to absorb it," he said.

Shipping rates are now seeing a "fairly sustained increase where the price throughout is actually accelerated but persisted for a little while," he said, pointing to the Harper Peterson Charter Rate Index which is up over 800% since July last year. "That's another reason that we might actually anticipate the potential for there to be a little bit more pass-through in the final goods for consumers."

Fed Chair Powell described recent inflation trends as a "cause for concern" at Friday's Jackson Hole meeting but pointed to "a number of factors that suggest that these elevated readings are likely to prove temporary." A major issue for policymakers is how quickly prices actually moderate into next year, and some ex-Fed economists have highlighted disinflationary risks in 2022. (See: MNI: Patience Warranted as Inflation to Ease - Ex-Fed Economists)

TEST OF PATIENCE

"Some of the inflation we've seen is certainly transitory. The question is have we seen some permanent inflation as well -- that remains to be seen," James McAndrews, a former New York Fed economist, told MNI.

"Ideally we'd like to see the long-run supply response in many of these sectors before we judge but policymakers don't necessarily have that luxury. So it requires a lot of careful thought to try to measure how much of the inflation is really more than transitory," he said.

Indeed, Sly says shipping costs and other supply pressures suck as domestic trucking are reflected only gradually in changes to consumer prices, lengthening their effects. "The pass-through to inflation comes incrementally," he said. "I'd anticipate that would peak somewhere around a year to 18 months out."

Still, Sly sees this as one-time hit to prices that's unlikely to be repeated.

"You're seeing businesses being able to adapt to this and make plans and adjustments," he said. "Businesses are, naturally through market forces, starting to readjust their contracts and that's going to ease some of the pressure off."