Risk of high inflation dogs central bankers

Recovery likely to take quarters, years, not weeks, months

A key measure of inflation expectations released on Tuesday showed continued acceleration, a survey that came as Richard Clarida, the Federal Reserve’s vice chair, indicated that central bankers were alert to the risk of high inflation.

The combination underscored that the threat of a longer period of rising prices has become more pronounced.

In remarks prepared for the Institute of International Finance’s annual meeting, Clarida said he believed that the “unwelcome” jump in inflation this year, “once these relative price adjustments are complete and bottlenecks have unclogged, will in the end prove to be largely transitory.”

“That said, I believe, as do most of my colleagues, that the risks to inflation are to the upside, and I continue to be attuned and attentive to underlying inflation trends,” he added, “in particular measures of inflation expectations.”

Fed officials received bad news on inflation expectations Tuesday morning. The Federal Reserve Bank of New York’s Survey of Consumer Expectations showed that medium-term inflation expectations — those for three years ahead — climbed to 4.2% in September from 4% in August. That is the highest since the series started in 2013. Shortterm expectations jumped to 5.3%, also a new high.

Central bankers have said for months that they expect this year’s rapid inflation to fade as consumers and businesses get back to normal, because it is the product of surging demand when supply is struggling to catch up thanks to factory shutdowns and shipping bottlenecks. But it has become increasingly clear that the adjustment will be measured in quarters and years rather than weeks and months, and policymakers have increasingly braced for the possibility that quick price gains could last considerably longer than they had first anticipated.

Even so, Clarida and his colleagues at the Fed are moving only gradually to remove their support from the economy, cognizant that millions of jobs are still missing compared with before the pandemic. The Fed signaled in its latest policy decision

that it would soon begin to taper its large monthly asset purchases, which it has been using to keep many types of borrowing cheap.

Clarida reiterated that belief on Tuesday, saying Fed officials “generally view that, so long as the recovery remains on track, a gradual tapering of our asset purchases that concludes around the middle of

next year may soon be warranted.” But even once that process gets going, interest rates are expected to remain near zero for months or even years.

Still, the Fed is staring down a challenging 2022, a year when it may have to decide whether it can keep rates near rock bottom while inflation is taking time to fade. Officials are still hoping price gains will slow to more normal levels, allowing them to be patient in removing policy support.