“Unacceptably high” prices are likely to stick with consumers through the rest of the year and the US economy is likely to slow down, US Secretary of the Treasury Janet Yellen said on Sunday.
“We’ve had high inflation so far this year, and that locks in higher inflation for the rest of the year,” she said on American Broadcasting Co’s This Week.
“I expect the economy to slow,” she said, adding: “But I don’t think a recession is at all inevitable.”
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US inflation last month accelerated to 8.6 percent, a fresh 40-year high that signals price pressures are becoming entrenched in the economy.
Those figures dashed any hope that inflation was starting to ebb, prompting the US Federal Reserve to unleash its biggest interest-rate increase since 1994.
The reasons behind stubborn inflation are “global, not local,” said Yellen, who pointed to disruption in energy supply from Russia’s invasion of Ukraine and goods coming in from China where COVID-19 lockdowns continue.
“These factors are unlikely to diminish immediately,” she said.
Federal Reserve Bank of Cleveland President Loretta Mester echoed Yellen’s view that growth will slow down, saying that threat of a US recession is increasing.
“The recession risks are going up partly because monetary policy could have pivoted a little bit earlier than it did,” she said on Sunday on CBS’ Face the Nation, referring to criticism that the Fed failed to raise rates at the first signs of runaway inflation late last year.
Mester sees it taking several years for the year-on-year headline inflation rate to return close to the Fed’s 2 percent goal.
Soaring prices are hurting Americans and an economic downturn by the start of 2024, barely even on the radar just a few months ago, is close to a three-in-four probability, the latest estimates by Bloomberg Economics showed.
US National Economic Council Director Brian Deese painted a rosier picture of the economy than Yellen and what Fed officials are saying. Deese referred to “independent forecasters” who “see inflation beginning to moderate over the course of this year.”
He also expressed hope that congressional passage of a bill that would lower the cost of prescription drugs, offer tax incentives for energy and other measures will take the pressure off of household finances.
Yellen said a gasoline tax holiday is “worth considering” if it could help consumers weather inflation.
“We have real strengths in this economy,” Deese said on CBS, citing high household savings and a jobless rate of 3.6 percent.
He said that the administration seeks to bring down inflation in a way “where we don’t have to give up all of those economic gains.”
Still, the US economy would likely fall into a mild recession by the end of the year, economists at Nomura Holdings Inc said.
“With rapidly slowing growth momentum and a Fed committed to restoring price stability, we believe a mild recession starting in the fourth quarter of 2022 is now more likely than not,” Nomura economists Aichi Amemiya and Robert Dent wrote in a note yesterday.
Excess savings and consumer balance sheets would help mitigate the speed of economic contraction, but monetary and fiscal policy would be constrained by high inflation, they said.
Nomura has lowered its real GDP forecast for this year to 1.8 percent, compared with 2.5 percent earlier, while the projection for next year is seen declining 1 percent, from 1.3 percent growth earlier.
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