Fed officials are willing to look past the elevated readings specifically because they are expected to be, as central bankers often say, “transitory.” They would worry more about a generalized, economywide pickup in prices that happens year after year, chipping away at consumer paychecks and potentially influencing how businesses and households live their economic lives.
But policymakers are still eager to see their expectation for an inflation slowdown borne out.
A “narrative for why the current supply and demand constraints might be expected to ease over time strikes me as a reasonable baseline,” Esther George, president of the Federal Reserve Bank of Kansas City, said in a speech Wednesday after the report, while emphasizing that the “narrative would be incomplete without acknowledging the risks.”
Ms. George pointed to the rise in coronavirus infections tied to the Delta variant, which could keep supply chains kinked, and to household savings, which could keep consumers spending strongly and economic conditions “tight.”
Economists have flagged other forces that could sustain inflation. Goldman Sachs noted in a recent research note that revised-down production schedules at automakers suggest that some price pressures in the car industry could last into the fall. Shipping experts report continued delays and cost increases, which could also feed into consumer prices.
And moderation alone is not enough to take the pressure off the Fed and White House: Policymakers need a substantial cool-down. July’s 0.5 percent monthly increase was less rapid than the 0.9 percent gain from May to June, but if the current pace continued for a year, inflation would pick up by nearly 6 percent on an annual basis. That could leave consumers with substantially less purchasing power.
Fed officials will be watching for signs that today’s price increases are getting locked into consumer and business expectations, which could make them more lasting.
Wage increases and inflation expectations offer key signals about the future of inflation. If pay takes off on a sustained basis, employers may find that they need to charge more to cover their expenses. Likewise, if consumers and businesses start to expect rapid price increases, they may be more willing to accept higher prices, setting off a self-fulfilling prophecy.