Fed’s Bullard Sees Inflation Risks as Americans Adjust to Prices

Fed’s Bullard Sees Inflation Risks as Americans Adjust to Prices

Surging inflation this year could be creating a new pricing psychology where both businesses and consumers are getting used to rising prices, Federal Reserve Bank of St. Louis President James Bullard said, creating risks in 2022.

“I am concerned about the changing mentality I would say around prices in the economy and the relative freedom that businesses feel that they can just pass on increased costs easily to their customers,” Bullard said Monday during a virtual panel discussion hosted by the International Economic Forum of the Americas.

“For years this has not been the case in the U.S.,” Bullard said. “They felt like if they raised prices, they would lose market share. It would hurt their business. And consumers were rabid about moving to the lower-cost places, low-cost products. That may be breaking down.” 

Fed’s Bullard Sees Inflation Risks as Americans Adjust to Prices

Inflation measured by the Fed’s preferred index rose 3.6% in August excluding volatile food and energy prices. Bullard predicted that on that core basis, 2022 inflation would be 2.8%, well above the Fed’s 2% target. By contrast, the policy making Federal Open Market Committee’s median participant predicted 2.3% for next year, according to their September forecasts.

“This is a great debate, an important debate about how to handle this going forward,” Bullard said. “I am concerned that the risks are to the upside, that we will continue to get higher than anticipated inflation and that this higher inflation will persist into 2022. It will dissipate somewhat but not down to where we would like it to be in 2022.”

Bullard, who does not have a vote on monetary policy this year, has recently been among the more hawkish policy makers at the U.S. central bank. 

He’s argued the FOMC should start to scale back its bond buying soon and complete the tapering by March 2022. That timetable, faster than others have suggested, would give the Fed the flexibility to raise interest rates earlier than expected if necessary to counter rising prices, he has argued. 

Fed Chair Jerome Powell, speaking to reporters Sept. 22 following a meeting of the FOMC, said the central bank could begin to taper its $120 billion in monthly asset purchases as soon as November and end the process by mid-2022.

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