Fighting Inflation

Dec 7, 2022Articles

The inflation rate has seen the fastest pace of increase in over 40 years. According to a Wall Street Journal article by Nick Timiraos, Federal Reserve of­fi­cials are likely to de­bate next week how much to raise rates in Feb­ruary, with views shaped by how they see un­der­ly­ing price pressures. If in­fla­tion slows but the la­bor mar­ket stays tight, they could be more di­vided over how to pro­ceed.

Essentially, in order to help reduce inflationary pressures, the Fed needs to see a cooler job market. The problem is that while jobs have rebounded since the pandemic recession, the workforce has not as the labor participation rate according to the Bureau of Labor Statistics has dipped for the third straight month in November. 

Some officials could seek to push through another half-point rate rise in February because they see a greater risk that inflation won’t decline enough next year. Without signs of slower hiring, they could worry that inflation could pick up again. 

The Bureau of Labor Statistics found that the economy added 263,000 jobs in November so the competition for workers is only slightly slowing down. Wells Fargo economists, Sarah House and Michael Pugliese, think that “the labor market remains far too hot for the Fed’s liking.” 

Oth­ers see in­fla­tion as be­ing dri­ven pri­mar­ily by sup­ply bot­tle­necks and an overheated hous­ing mar­ket. They think that as ac­tiv­ity cools and sup­ply-chain woes ease, in­fla­tion will rapidly de­cline and be closer to 2% in the com­ing year, and they would pre­fer a quar­ter-point rate in­crease in Feb­ruary. Fed Chair Jerome Pow­ell said it is hard to judge how high rates need to rise to slow the econ­omy be­cause of post-pandemic dif­fi­cul­ties fore­cast­ing in­fla­tion, sup­ply bot­tle-necks, and shifts in de­mand.

The resolution of bottle-necks will depend on an easing of consumer goods demand and the recovery in labor force participation, which can support short-run supply and expand longer-term production capacity. 

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