Officials from the Federal Reserve said on Thursday that they expect inflation to remain elevated into 2022.
On Capitol Hill, Federal Reserve Chairman Jerome Powell told the House Financial Service Committee that the supply-side restrictions the economy is currently experiencing will taper, but it may not be as soon as some are hoping.
“What we are seeing is an unusual event that’s part of the broader Covid-19 event,” Powell said during the hearing. “The economy is reopening but we are hitting supply-side bottlenecks, for example. Lots of prices are being affected by this.”
Powell added that it is impossible to say when inflation will fall. However, he expects that investors “will start seeing some relief” as early as the first half of 2022.
Inflation top of mind for investors
Chicago Federal Reserve Bank President Charles Evans echoed Powell’s sentiment during an online event at Princeton University’s Benheim Center for Finance, telling the crowd that keeping interest rates low will be the catalyst in bringing US inflation down to 2%.
“Let's be patient and not declare victory on inflation,” he said during the event.
Inflation has been on the forefront of many investors’ minds as the market hurls toward the end of September.
At the closing bell on Thursday, the Dow Jones Industrial Index was down 1.49% or more than 485 basis points. The S&P 500 was also down 1.1% while the Nasdaq lost 0.44%. Over the last four weeks, the Dow lost 4.16% while the S&P and Nasdaq lost 4.79% and 5.62%, respectively.
Meanwhile, the 10-year Breakeven Inflation Rate that is tracked by the Federal Reserve Bank of St. Louis shows that inflation increased by a net 0.05 points in September.
However, the gauge has climbed steadily over the last week, the longest such stretch since June.
Energy cost pressure
Some analysts have a more bearish view of US inflation rates, arguing that the country could be moving toward an “era” of high inflation if energy costs cannot be contained.
In a note published on Thursday, Neil Shearing, the chief economist at Capital Economics, a London-based firm, anticipates a sustained rise in inflation, the most likely outcome is that it increases to moderately higher rates of 3% to 4%.”
However, Shearing writes that inflation will not rise equally across the board. He expects inflation in the UK, Japan, and Asia to remain lower than the US inflation rate.
“But risks are generally skewed to the upside and there is a real possibility that inflation increases to a much higher rate that would, in time, necessitate a more substantial tightening of policy,” Shearing added.
According to the latest Consumer Price Index figures from the Bureau of Labor Statistics, energy costs have far outgrown the price of food and all other materials over the last year.
Energy costs have increased by approximately 25% compared to just 3.7% for food and 5.3% for all other items, the data shows.