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What's really going on with inflation? Economists weigh in

Jaimie Ding, Los Angeles Times on

Published in Business News

The high inflation is cause for alarm for Fed Chairman Jerome H. Powell, who told Congress on Tuesday that the central bank was prepared to speed up the interest rate increases it planned for 2022. Increasing interest rates depresses borrowing and spending, which in turn cools off demand and eases the pressure on suppliers. Powell has called the rise in inflation a "severe threat" to the goal of maximizing employment.

"This is a very critical turning point," Reaser said. "The Federal Reserve could either be wrong in tightening too much or it could be wrong in tightening not enough."

Some also question the need for the Federal Reserve to take action at all, if it's all being caused by the pandemic. If the supply chain issues were resolved, wouldn't inflation also take care of itself?

Still, Feler said the institution would "likely err" on the side of tackling inflation now.

The Fed "doesn't want to take the risk that inflation will become an anchor — that people will expect inflation to be higher, and therefore, they'll start raising prices in anticipation of higher inflation," he said.

 

When can we expect relief from higher prices?

Don't hold your breath. In the near term, we'll probably see inflation spread from cars and energy to other areas, Reaser said. She points to medical costs and rent increases as "sleeping giants" that are likely to hit consumers in the coming year.

Ultimately, as has been the case the last two years, the economy will remain at the mercy of the coronavirus.

"If the pandemic is transitory, inflation should also be transitory," Feler said. "And what ended up happening is that the pandemic has become persistent. And what we've seen is that inflation has been more persistent than we thought it would be."

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