US Fed chief says stimulus to continue despite high inflation

Washington: Even as US inflation has hit the highest rate in over a decade, the central bank is sticking to its guns, and will continue to provide stimulus until the economy has fully recovered, Federal Reserve Chair Jerome Powell said on Wednesday.

Powell acknowledged that inflation will remain "elevated" in coming months but will decline once supply bottlenecks and other temporary issues are resolved.

And the world´s largest economy still has "a long way to go" to return to full employment following the Covid-19 pandemic, Powell said in his semi-annual testimony to Congress.

The Fed "will ensure that monetary policy will continue to deliver powerful support to the economy until the recovery is complete," he said.

Inflation has surged in recent months, with the annual consumer price index (CPI) hitting 5.4 percent in June, the highest since August 2008.

And wholesale prices also are soaring, with the producer price index jumping to 7.3 percent in the 12 months ended in June, the highest since the Labor Department began measuring in November 2010, according to data released Wednesday.

But Powell and other Fed officials have stuck to their argument that the high rates have been driven mostly by temporary issues related to the struggles to reopen the economy following the pandemic shutdowns and are not a reason to pull back on stimulus efforts.

Many private economists agree, saying inflation peaked in June, but Powell is likely to face tough questions from members of the House Financial Services Committee. He is due to appear again Thursday before the Senate Banking Committee.

"Inflation has increased notably and will likely remain elevated in coming months before moderating," Powell said in his prepared testimony.

He cited the impact of supply issues including a global semiconductor shortage that has hindered auto production, and said those factors "should partially reverse as the effects of the bottlenecks unwind."

The Fed cut the benchmark lending rate to zero right at the start of the pandemic and implemented a massive bond-buying program to provide liquidity to the economy during the crisis.

Central bankers have pledged to maintain the stimulus until inflation holds above the two percent goal and the labor market has recovered.

Inflation for years lagged below that target level, so the Fed has shifted its focus to "aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time," Powell said.

And while job gains are expected to continue, Powell said "reaching the standard of ´substantial further progress´ is still a ways off."

He noted that low wage workers, African Americans and Hispanics were hardest hit by the pandemic job losses and "still have the most ground left to regain."

Fed officials have begun to discuss when they will start to taper the $120 billion a month in asset purchases, and Powell again pledged to give advance notice before making any changes.

Meanwhile, US wholesale price inflation shot up 7.3 percent for the 12 months ended in June, its largest-ever yearly increase since the Labor Department began tracking it more than a decade ago, data said.Compared to June, the producer price index (PPI) last month rose one percent, seasonally adjusted, much higher than expected and above the 0.8 percent month-on-month increase seen in May.

The data will fuel speculation over whether the United States is set for prolonged inflation as vaccines allow its economy to rebound from business restrictions imposed last year to stop Covid-19, which caused a record economic collapse.

The Labor Department had yesterday reported the consumer price index rose 5.4 percent in the 12 months ended in June, not seasonally adjusted, its highest rate since August 2008.In the wholesale price data, the government said nearly 60 percent of the overall increase was caused by a 0.8 percent rise in prices for services. Price for goods rose 1.2 percent, the data said."Core" PPI excluding the more volatile food, energy and trade services categories rose 0.5 percent in June, less than the 0.7 percent increase in May.

However, if compared to the 12 months ending last month, the increase in core PPI was 5.5 percent, the largest advance since the yearly index began in August 2014.The overall 12-month PPI increase was not seasonally adjusted, and was its biggest climb since the Labor Department began the calculation in November 2010.