American Peterbilt truck on Interstate 10 truck route in Louisiana.
Tim Graham | Getty Images
Federal Reserve Chairman Jerome Powell’s belief that the inflationary winds ripping through the US economy this year will soon subside is not widely shared.
Indeed, a growing contingent in the Fed’s virtual halls gives cause for concern that supply chain disruptions, growing demand, and shortages of manpower and supplies could propel the current trend well into 2022 and beyond.
Patrick Harker, president of the Philadelphia Fed, said so on Friday in a CNBC interview that aired shortly before Powell’s keynote speech at the Jackson Hole Symposium.
Not only has the Fed hit the inflationary portion of its mandate by holding levels well above 2% for a period of time, but it is also facing the challenge that this price pressure does not seem to be easing, Harker said.
“There are also some indications that they may not be as fleeting, and that is a risk that I am concerned about,” the central bank official said in an interview about two hours before Powell’s speech.
Business contacts in Harker’s region “see significant price pressure,” he added. “What I hear is they are trying not to pass most of it on to the consumer and customers … that is, they are passing some of it on. It is inevitable. So far people have understood. That won’t last forever. At some point we have to get a grip on that. “
These remarks were in stark contrast to Powell’s speech.
The Fed chief devoted a long section in his remarks to refute the idea that inflation is a longer-term structural problem for the economy. He attributed most of the current price hike to a surge in longer-lasting “durable” goods, which in fact had sustained negative inflation in pre-pandemic times.
In addition, there is evidence that a key area of inflation, used car prices, has stabilized and the overall rate is likely to move much closer to the longer trend. Early Friday morning, the Commerce Department reported that the Fed’s preferred inflation meter, the consumer spending price index, rose 3.6% year over year, the fastest pace in about 30 years.
“The rise in inflation so far has largely been the product of a relatively narrow group of goods and services directly affected by the pandemic and the reopening of the economy,” Powell said. “We are also directly monitoring the prices of certain goods and services hardest hit by the pandemic and reopening, and in some cases see moderation as the shortages subside.”
A view from the street
That’s not what Mike Kucharski, the owner of JKC Trucking from Summit, Illinois, sees in his day-to-day business contacts.
Instead, he experiences rising freight rates due to lower capacities, increasing demand and sharply increased energy prices. The lack of food ingredients – he cited gluten for bread as an example – and other raw materials are also driving inflation.
In addition, there are long delivery delays as blocked ports worsen the shortage of goods. Labor is also scarce as workers are reluctant to return to work, despite the fact that there are more than 10 million vacancies, a record for the US
“The catalyst for skyrocketing food prices is that fuel has gone up, our insurances have gone up, all costs have gone up, including labor supplements,” said Kucharski. “The stimulus checks do not help, because even while the truck drivers have worked through the pandemic, we deliver to warehouses where some of them need two or three days to unload because they do not have the capacity and the staff.”
In fact, freight costs, which were declining from mid-2018 until the pandemic, have risen to record levels since then. The long-haul truck load rate rose 28.5% year over year in May, which was by far the highest ever in December 2004 data, and rose at an astronomical rate in July, according to the Department of Labor 20.5%.
These are the types of editions that will ultimately find their way onto the shelves.
“Any additional costs that we pass on to ourselves, we have to pass on to the customers,” said Kucharski. “Our margins are very small.”
Low wage earners are hardest hit
The impact that companies like JKC Trucking are feeling is on the minds of several Fed officials, fearful that rising costs will hit especially low- and middle-income households, the least able to absorb them.
In the past two days, no fewer than five regional presidents of the Fed said it was time to pull back on monetary policy for the past year and a half, citing various levels of confidence in the economy dampened by inflation concerns.
“We want to make sure we’re in because high inflation, or anything close to runaway inflation, is really going to hurt the people at the bottom of the ladder,” Atlanta Fed President Raphael Bostic said Friday opposite CNBC.
Fed Vice President Richard Clarida was a notable exception, telling CNBC on Friday that he agreed with the “temporary” view of inflation despite acknowledging the higher pressures now prevailing.
“What I would say is my basic view that it is largely temporary,” he said. “I think inflation risks are on the upside, so I think my colleagues will look closely at the data.”
For his part, Powell acknowledged that the Fed has likely hit its 2% inflation target not only in the short term but also in the longer term. In a rare revelation of what’s going on behind the closed doors of the Fed, Powell said that he and others agreed at the July meeting of the Fed’s Open Market Committee that it is at least about time the minimum of US $ 120 billion – Withdraw dollars for bond purchases, although rate hikes are a separate consideration saved for later.
Powell also acknowledged inflation “is a cause for concern” but said current levels “are likely to prove temporary”.
But with the conditions that create inflation not easing, Kucharski said the problems now are likely to persist until at least next year and maybe beyond.
“Everyone increases the cost just to stay afloat and keep the wheels turning,” he said. “But it affects the end user, the American people. We’ve passed our current rate to the shelves.”
Become a smarter investor with CNBC Pro.
Get stock picks, analyst calls, exclusive interviews and access to CNBC TV.
Sign up to start a free trial today.