Inflation 'very concerning', Fed official warns

Inflation is “very concerning” and is “spreading broadly”, warned Neel Kashkari, president and CEO of the Federal Reserve Bank of Minneapolis, on Sunday (7/31).

Appearing on CBS’s “Face of the Nation”, the top federal official said that the rate of inflation was higher than expected. U.S. inflation rose to 9.1% last year, a record high in the last four decades. This increase is not limited to a small number of sectors, but it affects almost all aspects of the economy. He promised that the Federal Reserve was “committed” to doing all it can to bring inflation under control.

Rising Wages vs. Rising Cost

The warning may seem unwarranted given the rising wages most Americans currently experience, but Kashkari explained that the rising cost of goods and services far outpace the rate of wage growth. This effectively means that Americans have weaker purchasing power against the rising cost of living, or a “real wage hit”, as Kashkari put it.

Instead of wage-driven inflation, where high prices are the result of rising wages, what is taking place now is the opposite. Wages are trying to catch up with rising prices. Several factors contribute to this increase in prices, such as the war in Ukraine, supply chain issues, and the ongoing pandemic.

To illustrate, rental costs rose 0.8 percent in June, according to the Bureau of Labor Statistics (BLS). Gasoline prices rose 11.2 percent, while electricity costs increased 1.7 percent. Americans will have to pay more in healthcare costs as well, given the 0.7 percent rise. A recent report published by the Bureau of Economic Analysis (BEA) showed that the prices of goods rose 1.5 percent, while food prices rose 1.0 percent.

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Fed’s solution

The Federal Reserve’s top priority is to reduce inflation. Kashkari promised that the Fed is committed to pursuing all possible avenues to curb inflation and avoid the recession.

As for the Inflation Reduction Act, the new bill proposed by Senate Majority Leader Sen. Chuck Schumer (D-NY) and Sen. Joe Manchin (D-WV), Kashkari did not think it would “have much of an impact on inflation”.

The Act aims to reduce inflation by implementing deficit reduction. It also proposes several new healthcare policies as well as reducing taxes on small businesses. The White House has welcomed the bill, pointing out its similarities to the Build Back Better initiative.

Kashkari did not think the bill would have any major impact on inflation. His stance is supported by the Penn Wharton Budget Model, which estimated that the bill will have an almost zero impact statistically.

The urgent issue right now, Kashkari believes, is a supply/demand mismatch. This is the issue that the government needs to focus on.

It is a question asked by many, but according to Kashkari, whether the U.S. is in a recession is not important. Instead, he prefers to focus on inflation and wage data. He would like to see the economy slow down.

Kashkari also emphasized that the Federal Reserve had a target for fighting the current inflation and is committed to following through.

“We are a long way away from achieving an economy that is back at 2% inflation. And that’s where we need to get to,” he said.