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The fact that supply shortages count for so much of the overshoot explains how inflation can ease into 2022. Producers were"not able to handle this big spike in demand we're seeing," Fed Chair Jerome Powell said in a July 28 press conference. But the leap in inflation is"really a shock to the economy that will pass through" as the economy settles into a new normal, he added.One factor, however, can still throw a wrench in the Fed's outlook.
Higher inflation expectations act as a sort of self-fulfilling prophecy. As Americans' expectations climb, businesses tend to lift prices. That then leads workers to ask for higher wages, which can spark a vicious cycle of persistently higher inflation. Powell indicated in July that inflation expectations"appear broadly consistent" with the Fed's price-growth target. Still, if moods change and Americans start worrying about faster price growth, the central bank's"transitory" forecast could go up in smoke.
"You can get into this cycle where inflation starts to take off and become more permanent," Kroszner said."That's really the key: Can [the Fed] keep inflation expectations well anchored? We'll see."Subscribe to push notifications
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