Yellen confident rising inflation won’t be ‘permanent’

Treasury Secretary Janet Yellen sought to assure lawmakers Wednesday that historically high inflation would cool off as the U.S. economy continues to rebound from COVID-19.

Testifying before the Senate Finance Committee, Yellen said that while she was keeping a close eye on rising inflation, she doesn’t “anticipate that it will be permanent.”

Yellen reiterated what she, Federal Reserve Chairman Jerome Powell, and many economists have said about the recent surge in prices from pandemic lows. She explained that annual measures of inflation are reflecting the sharp climb in prices from lows they hit during the pandemic and that short-term supply constraints are also forcing producers and shippers to raise prices.

“Partly what we’re seeing is that prices, they just collapsed at the onset of the pandemic in the service sector,” Yellen said. 

“As the economy’s opening back up again, prices are now moving back towards normal levels in leisure, hospitality, airfares and the like. In most cases, prices remain below pre-pandemic levels, but they’re rising and that’s some of what’s going on here, but there’s also bottlenecks and firms are clearly having difficulty hiring workers.”

While inflation was widely expected to rise as the retreat of the pandemic fueled more demand for goods and services, the faster-than-projected rate of price increases along with several tepid monthly job gains has prompted more skepticism of Yellen and Powell’s approach.

Republican lawmakers and inflation-wary analysts argue that trillions in proposed spending from the Biden administration could overheat the U.S. economy and spur rapid inflation. They’ve also expressed concerns that the Fed’s commitment to keeping interest rates near zero percent through the end of 2022 and a lack of clear end date on its monthly bond purchases could do the same.

Sen. Chuck Grassley (R-Iowa) criticized Yellen’s “nonchalant” view on inflation and argued that the U.S. risked falling into a dangerous inflationary spiral akin to the rapid price increases of the 1970s.

“Isn’t it incumbent upon the president, the U.S. secretary of Treasury, and even us in the Congress to take inflationary risk seriously by pursuing responsible fiscal policies, not just expecting the Fed to clean up a mess after the fact?” Grassley asked.

Sen. Mike Crapo (Idaho), the ranking Republican on the Finance Committee, raised fears that even a brief jump in inflation could raise long-term inflation expectations. When financial markets and consumers expect more inflation in the future, inflation itself — along with borrowing costs — can rise in anticipation.

“If inflation expectations become unanchored, which no one can credibly claim cannot happen, the resulting increased interest rates can turn federal debt service costs into budget busters,” Crapo said.

Yellen, who chaired the Fed board from 2014-18, countered that inflation expectations “by most measures” are well anchored and that a wide range of economic forecasters see inflation easing once the economy hits a steadier pace.

“I believe our economy is on track to get back to a more normal operation, in that inflation will decline over time, but we’re going to monitor it very carefully.”