Daily Management Review

US Inflation Rise Driven By Pent-Up Demand And Supply Shortages


US Inflation Rise Driven By Pent-Up Demand And Supply Shortages
The underlying inflation in the month of April in the United States surged past the Federal Reserve’s 2 per cent target with surge in consumer prices in the country. That was the largest annual gain since 1992.
This was driven by release of pent-up demand as well as supply constraints as the economy reopened from the pandemic.
With the easing of restrictions imposed during the pandemic because of vaccinations, the strong inflation numbers as reported by the Commerce Department had been widely anticipated. It is also expected that this rise in inflation will not have an impact on the Fed’s monetary policy.
Higher inflation will be transitory, Fed Chair Jerome Powell has repeatedly stated.
Last year, the US central bank cut down its benchmark overnight interest rate to near zero and has been pumping money into the economy via purchasing bonds on a monthly basis. The fed has also signalled that higher inflation could be tolerated by it for some time so that those years when inflation was lodged below its target could be offset. The inflation target of the Fed is a flexible average.
A shift in demand towards goods and away from services during the pandemic was reflected by the supply constraints. With more Americans going to vacations and staying at hotels among other activities marks a reversal in the economy. Year-on-year inflation is also accelerating as last spring's weak readings drop from the calculation.
"Many goods are in short supply amid very strong demand and supply chain disruptions, and some services prices are up sharply as consumers start to go out again," said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. "Shortages of labor in some industries are also contributing to higher prices. But many of these factors will prove transitory, and inflation will slow in the second half of 2021."
There was a 0.7 per cent rise last month in the consumer prices which is measured by the personal consumption expenditures (PCE) price index, excluding the volatile food and energy components. There were strong gains in both goods and services. That was the biggest rise in the so-called core PCE price index since October 2001 and followed a 0.4% gain in March.
"Inflation is up, but real yields are still low," said Jamie Cox, managing partner at Harris Financial Group in Richmond, Virginia. "This is basically the transitory sweet spot."
However there were some economists who were of the opinion that the higher inflation will not be temporary.
"Concerns about the future can cause households to become more conservative in their spending," said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania. "The Fed is guessing that the rise in inflation will be temporary, and it better be correct."