Fed Words and Actions Under Microscope After CPI Reading

Federal Reserve Chairman Jerome Powell did ask for more inflation publicly many times. The old adage be careful what you wish for comes to mind. The reading was true surprise, not a slightly higher reading than expected. There is no doubt that some of this is transitory as the Fed postulated—record demand is meeting strained and, in some cases, broken supply chains. This is causing shortages in price spikes all across economy. If you have a used car to sell, by the way, now is probably the time. Prices jumped 10% (this accounted for roughly a third of the month’s CPI increase). The previous fact shows how the data comps are causing some numbers that may be distorted.

A typical after effect of pandemics may be partially at play. A worker shortage is pushing wages up, which may be starting to feed into increasing prices. We discussed the nature of the CPI data with our data science team. We think it is distinctly possible that CPI numbers next month could be even higher. This is partially due to the comps, a year ago the economy was undergoing an unprecedented shutdown. It’s also due to the supply chain interruptions, rising commodities and food prices and other transitory factors. The big question is if the Fed is misreading the inflationary forces. Is this an awakening beast that will result in monetary folly? Only time can tell; however, the Fed itself seems pretty assured in sticking to its ultra-accommodative course at this time.

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