A sharp rise in oil and gas prices and other commodity disruptions related to the war in Ukraine could drive up already accelerated prices, causing problems for Consumer inflation expectations. Expectations can become self-fulfilling if shoppers and businesses anticipate year-on-year inflation and act accordingly.
“The risk is growing that a prolonged period of high inflation could push long-term expectations uncomfortably higher,” Powell said.
However, he noted, the labor market is already very strong, which may help the economy endure a period with more restrictive policy.
“By many measures, the labor market is very tight, and much more compact than the very strong labor market right before the pandemic,” Powell said. “Record numbers of people leave their jobs each month, usually to take another higher paying job.”
Federal Reserve officials hope that workers – who are in short supply – will return to the labor market in the coming months and years, helping to Reducing pressure on employers. If that happens, it could help slow inflation while moderating wage growth.
“In a sense, it’s a great job market” – but not a sustainable market, said Mr. Powell. “This is an unbalanced labor market, and it already has an excess of demand over supply,” he noted.
Employees have returned more slowly than forecasters expected, either because they retired early or because pandemic-related problems such as a lack of care are keeping them at home. Likewise, supply chain problems, such as factory closures and the shipping crisis, have been slower to recover, in part due to recurring coronavirus outbreaks.
“It is still likely that the hoped-for supply-side recovery will come over time as the world eventually stabilizes into a new normal, but the timing and scope of this easing is highly uncertain,” Powell said. “In the meantime, as we lay out the policy, we will look to actual progress on these issues and not assume significant supply-side easing in the near term.”
Talmon Joseph Smith Contribute to the preparation of reports.