In testimony before the Senate Committee on Finance, US Treasury Secretary Janet Yellen said that she expected inflation to stay high. She also noted that the Biden administration's budget proposal would increase the inflation outlook for this year to 4.7%.
Yellen noted that the US economy is still experiencing significant macroeconomic challenges in her testimony. These include the high inflation and the supply chain disruptions caused by the pandemic and the conflict in Ukraine.
Despite the high inflation in the US, Yellen said that she expected prices to eventually start to fall. She also noted that the country was dealing with unacceptable levels of inflation.
The Consumer Price Index has been rising at over 8% in the past couple of months, which is the highest since the 1970s. It exceeded the Biden administration's budget forecast for the next fiscal year.
The core consumer price index, which excludes volatile food and energy costs, moderated to 4.9% in April. "I do expect inflation to remain high although I very much hope that it will be coming down now," Yellen said.
Denying Republican assertions
During her testimony, Yellen also rejected the claims made by the Republican members of Congress that the spending legislation's $1.9 trillion was responsible for the surging inflation rates.
In response to a question, Yellen said that the high inflation in the US and other developed countries was due to different policies. She noted that the impact of the American Recovery Plan (ARP) was not reflected in the inflation numbers.
"We're seeing high inflation in almost all of the developed countries around the world. And they have very different fiscal policies," Yellen said. "So it can't be the case that the bulk of the inflation that we're experiencing reflects the impact of the ARP."
Despite the slow progress of the budget process, the Biden administration still plans to implement its climate and social spending agenda. One of the policies that it would like to include is reducing prescription drug prices.
In her testimony, Yellen repeated that the rise in inflation was mainly due to the high energy and food prices caused by the conflict in Ukraine. She also attributed the increase in the supply chain disruptions to the emergence of new COVID-19 variants.
Yellen's 'transitory' period
After Yellen admitted that she was wrong when she said that inflation would eventually subside, the secretary will face more questions from Congress members on Wednesday.
She also noted that both she and Jerome Powell, the chairman of the Federal Reserve, could have used a better term for describing the rise in inflation.
When she stated that inflation would be transitory in the future, she did not anticipate the supply chain disruptions that would result from the conflict in Ukraine and other COVID variants. She also did not anticipate the impact of the invasion on energy and food prices.
"When I said that inflation would be transitory, what I was not anticipating was a scenario in which we would end up contending with multiple variants of COVID that would be scrambling our economy and global supply chains, and I was not envisioning impacts on food and energy prices we've seen from Russia's invasion of Ukraine," Yellen clarified.
In her testimony, Yellen noted that the risks of stagflation, which was the combination of high inflation and weak growth during the 1970s, are rising. The World Bank also warned that the global economy could grow at a slower rate of 2.9% in 2022.