Inflation is expected to increase in the coming months due to base effects, supply chain disruptions and pent-up demand and subside thereafter as the US economy recovers from the coronavirus pandemic, the White House said in a guidance published on Monday
WASHINGTON (Pakistan Point News / Sputnik - 12th April, 2021) Inflation is expected to increase in the coming months due to base effects, supply chain disruptions and pent-up demand and subside thereafter as the US economy recovers from the coronavirus pandemic, the White House said in a guidance published on Monday.
"We think the likeliest outlook over the next several months is for inflation to rise modestly due to the three temporary factors .... and to fade back to a lower pace thereafter as actual inflation begins to run more in line with longer-run expectations," the White House said. "Such a transitory rise in inflation would be consistent with some prior episodes in American history coming out of a pandemic or when the labor market has quickly shifted, such as demobilization from wars."
The White House noted that the base effects in annual inflation measures occur when the base, or initial month, of a growth rate is unusually low or high, citing the bottom set in the early part of the pandemic in April 2020.
"Twelve months later, due to the suddenness and scale of this earlier decline, we expect year-over-year inflation growth rates for the next few months to be temporarily distorted by these sorts of base effects," it said.
The Federal Reserve has set an annual inflation target of 2 percent.
While price data for March or April were not yet available, the White House said that if it were to assume monthly inflation growing at just under 0.2 percent, then the two months could see an increase of 2.3 percent due to the change over the previous year in the core Personal Consumption Expenditure calculator.
In terms of supply chain disruptions, this type of inflation was mainly transitory, as prices of commodities such as lumber or energy rose during supply tightness, then stabilized at a higher level or decreased, with no further impact on future inflation.
"While we expect global supply chains to gradually unclog as world economies recover throughout 2021 and beyond, in the near-term some businesses may temporarily pass on the added costs from these disruptions into higher consumer prices," the White House said.
On the pent-up demand side, prices for many of the services most sensitive to the pandemic - such as hotels, sit-down restaurants and air travel - that decreased due to curtailed demand stemming from consumer anxiety and public health restrictions, were expected to spike briefly on reopening.
"Again, we expect this to primarily be a short-term issue; as businesses that shuttered or substantially reduced their services reopen, supply will increase to meet this pent-up demand," the White House said. "Encouragingly on this point, new business formation has picked up in recent months."
The White House also said a key determinant of lasting price pressures over the long term is inflation expectation. A spike in inflation expectations could lead to "economic overheating" that prompts the Federal Reserve to raise interest rates quickly, resulting instead in a slowing of the economy and an increase in unemployment.