Demand problems explain one-third of US inflation spike – SF Fed

People shop at a supermarket as inflation hit consumer prices in Manhattan, New York, U.S., June 10, 2022. REUTERS/Andrew Kelly/File Photo

June 21 (Reuters) – Only about a third of the current inflation spike in the United States is demand-driven, according to a study released by the San Francisco Federal Reserve on Tuesday, highlighting the difficulties facing U.S. central bankers to control inflation. .

The Federal Reserve has increased the size of its interest rate hikes as it tries to bring inflation back to its 2% target, raising borrowing costs last week by three-quarters of a percentage point to a range of 1.50% to 1.75% as it seeks to cool demand across the economy.

Inflation is currently three times that target, with a worse-than-expected price report earlier this month showing little sign of progress. Read more

Supply problems account for about half of the rise in current inflation levels, San Francisco Fed economist Adam Hale Shapiro wrote in the latest edition of the bank’s “economic letter,” the reasons for demand being responsible for about a third and the rest resulting from ambiguous factors.

This matters because, as Fed Chairman Jerome Powell acknowledged last week, the central bank’s task of reducing the current 40-year high inflation without inducing a sharp slowdown in economic growth or a sharp rise in unemployment increasingly depends on factors beyond its control. Read more

Supply chain issues, once seen as a problem bound to resolve quickly once the global economy reopens after COVID-19 pandemic-era lockdowns, have proven stubborn as China continues to struggle. Applying periodic restrictions to curb the spread of the virus as Russia invades Ukraine has caused energy and food costs to spike.

In the country, a nationwide labor shortage caused by the pandemic and other demographic factors is forcing companies to raise wages to attract workers.

“Inflationary pressures will not fully ease until labor shortages, production constraints and shipping delays are resolved. Although supply disruptions are expected to largely ease this year, this outcome is highly uncertain,” Hale Shapiro wrote.

Reporting by Lindsay Dunsmuir; Editing by Nick Zieminski

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