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Economic Report: Inflation has risen higher than Fed’s Brainard expected, but she says it will fade back to 2% or less

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The recent surge in U.S. inflation is likely to evaporate once the economy is fully recovered and business returns to normal, a senior member of the Federal Reserve said Tuesday.

Fed Gov. Lael Brainard acknowledged inflation has risen “somewhat higher” than she expected and that she is watching very closely for signs that it’s evolving in “unwelcome ways.”

Read: Why aren’t Americans happier about the economy? They are paying higher prices for almost everything

Yet she also reiterated her previous view that the increase in inflation won’t last, giving the Fed the flexibility to keep interest rates low and maintain other measures to boost the economy.

The Fed adopted took a series of unprecedented steps immediately after the coronavirus pandemic erupted to support the economy. Brainard and a majority of the Fed’s policymaking board say it’s too early to withdraw some of that support even in the face of rising inflation.

The chief sources of rising prices are what Brainard called temporary shortages of key supplies and labor tied to the reopening of the economy.

Read: U.S. inflation hasn’t been this high since 2008

“Many businesses shrank in order to survive the pandemic and now may be struggling or moving cautiously to expand capacity,” she said in a virtual speech to the New York Economy Club. “These mismatches are exacerbated in some sectors by idiosyncratic supply disruptions, such as in semiconductors, steel, and lumber.”

Read: Computer-chip shortage triggers first drop in durable-goods orders in a year

A surprising labor shortage, meanwhile, is likely the result of lingering fears of the coronavirus as well as limited options for the care of young children or aging family members, she said.

Read: ‘We are struggling to find employees to help us keep up’

Brainard expressed doubt that generous unemployment benefits are a big source of the labor market shortage. She noted that most of the jobs the economy added in April were in lower-paying occupations.

She said a combination of factors are keeping people out of the labor force, but expects more people to look for work in the coming months as the pandemic fades.

Read: Unemployment claims fall to new pandemic low of 406,000 as layoffs wane

Eventually, Brainard believes the low era of inflation that prevailed before the pandemic will return.

“It is critical to remember that inflation averaged less than 2% over the past quarter-century, and that statistical measures of trend inflation ran consistently below 2% for decades before the pandemic,” she said.

If the Fed is wrong and inflation remains elevated, she said, “we have the tools and experience to gently guide inflation back down to target, and no one should doubt our commitment to do so.”

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