US Secretary of the Treasury Janet Yellen said persistently weak inflation is likely to return as a long-term challenge for the economy and policymakers once COVID-19-era distortions behind the recent surge subside and prices cool.
“We’re just coming through an unusual and difficult period, but I do not think we’re in any way back to the ’80s and ’70s,” she said in an interview, referring to an era of rising prices and wages.
Yellen, along with US Federal Reserve Chairman Jerome Powell and many in the US economic establishment, incorrectly predicted in 2021 that the burst of inflation would be “transitory.”
Photo: AFP
She has since admitted getting that call wrong and supported the Fed’s efforts to rein in prices with aggressive interest rate hikes, which risk pushing the US into a recession.
Yellen said that unlike in the 1970s and early 1980s, this episode of high inflation has not triggered a wage-price spiral, a dynamic in which workers demand raises in anticipation of higher prices, prompting firms to increase prices.
Economists look for signs of such a spiral in inflation expectations.
“Expectations have been well-anchored, and I believe they’re still pretty well anchored,” she said in the interview in Johannesburg on Friday, on the final leg of a three-nation visit to Africa. “So we’re not seeing a wage-price spiral. That’s not happening.”
The annual increase in the consumer price index topped out at 9.1 percent in June last year, but slowed to 6.5 percent as of last month in response to the Fed’s rate hikes, as well as easing supply chain stresses and sliding oil prices.
Former US secretary of the Treasury Lawrence Summers and former IMF chief economist Kenneth Rogoff are among those who have warned the world’s economy is entering a period of geopolitical tensions and debt crises that risk making episodes of high inflation and high interest rates more common.
Former IMF chief economist Olivier Blanchard, is more aligned with Yellen, saying that today’s inflation should not last and that central banks, including the Fed, would face a return to an environment where interest rates are uncomfortably close to zero.
He has proposed that central banks lift their inflation targets from 2 percent to 3 percent to counter that.
“The pandemic created such unusual disruptions in the economy,” Yellen said. “There were just a lot of supply chain problems. We really hit the wall in a bunch of different sectors and prices really skyrocketed.”
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