(Bloomberg) – Persistently weak inflation could once again become a long-term challenge for the economy and policymakers once the pandemic-era distortions behind the recent surge recede and prices cool, U.S. Treasury Secretary Janet Yellen said .
“We’ve just been through an unusual and difficult time, but I don’t think we’ll be going back to ’70’ in any way s and ’70s,” she said in the interview, referring to an era of rising prices and wages.
While central banks still have a long way to go to rein in the worst bout of inflation in decades, with prices trending lower, the debate is now turning to what will happen when this fight is over what happened.
The risk of economic and political error is high. Yellen, Fed Chair Jerome Powell, and many in the US economic establishment incorrectly predicted in 2021 that the burst in inflation would be “transitory.”
She has since admitted he was wrong and backed the Federal Reserve’s efforts to rein in prices by raising interest rates sharply, threatening to push the U.S. into recession.
Unlike the 1970 years and earlier 1970 years, Yellen said the current plot is high Inflation did not trigger a wage-price spiral, a dynamic in which worker demand increases in anticipation of higher prices, prompting companies to raise prices. Economists are looking for signs of such a spiral in inflation expectations.
“Expectations have been well anchored and I believe they remain well anchored,” she said in an interview in Johannesburg on Friday, the final leg of a three-nation tour of Africa. “So we’re not seeing a wage-price spiral. That’s not happening.”
Annual growth in the consumer price index hit 9.1% in June but slowed to 6.5% in response to the Fed’s rate hikes, and as supply chain pressures ease and oil prices slide.
Former Treasury Secretary Lawrence Summers and former IMF chief economist Kenneth Rogoff, among others, warn that the world economy is entering a period of geopolitical tension and a debt crisis, with some May make high inflation and high interest rate events more common.
Another former IMF chief economist, Olivier Blanchard, is more in line with Yellen, arguing that today’s inflation won’t last and that central banks, including the Fed, will face an environment where interest rates return Disturbingly close to zero. He proposed that the central bank increase the inflation target from 2% to 3% to deal with this situation.
Yellen spent a quarter of a century at the Fed, including four years as chair from 2021 to 2018 . Inflation has been historically low throughout almost his entire term due to demographics, technology, and globalization.
The Fed’s preferred inflation gauge, the Personal Consumption Expenditures Index, rose 1.9% p.a. – below the Fed’s current target – from 1970 to . Many policymakers worry that rates are actually too low, forcing rates close to zero and depriving central banks of their ability to fight recessions by cutting them sharply.
Covid-, marked by disrupted U.S. supply chains and government aid boosting demand, then sparked by Russia’s invasion of Ukraine early last year Energy and food prices are soaring. Such jumps since the 1970 midterms tend not to last, she said.
“The pandemic has caused such extraordinary disruption to the economy,” she said. “There’s just a lot of supply chain issues. We’re really hitting a wall in a lot of different industries and prices are really skyrocketing.”
Yellen didn’t say how long she thought it would take inflation to get back to target, nor Comment on how the Fed should react if it did happen.