The US Federal Reserve may increase its near-term inflation forecast at the conclusion of its September meeting this Wednesday, an expert told Anadolu Agency on Tuesday.
"The surge in inflation is due to the pandemic, and the Fed is appropriately looking through it," Mark Zandi, chief economist at Moody's Analytics, said in an email interview.
"Demand has surged as the economy has reopened with the distribution of vaccines early this year, and the supply side of the economy has been slower to kick in given the disruptions created by the pandemic. Inflation will moderate as the pandemic winds down," he wrote.
The US consumer price index (CPI) rose 5.3% in August on an annual basis, after climbing 5.4% in June and July.
In August, the CPI was up 0.3% from the previous month, while it was up 0.5% in July from the month before, according to latest figures from the US Labor Department.
Meanwhile, the producer price index (PPI) soared 8.3% in August annually, after jumping 7.8% in July. In August, the PPI rose 0.7% from the previous month, after rising 1% in July.
However, the Fed's inflation estimates were far below those levels – 3.4% for 2021, and 2.1% for 2022, according to projections made at the conclusion of its June meeting.
Record number of open jobs
Fed Chair Jerome Powell has repeatedly said in recent months that the bank would allow inflation to climb above its target of 2% for some time, until a full recovery in the labor market is achieved, before any change in monetary policy.
The labor market, however, still remains weak after the world's largest economy added just 235,000 jobs in August, less than one-third of the expected 750,000.
"One month of soft jobs growth is not enough for the Fed to change this script. However, if it looks like (if) there will be a string of weak job gains, then the Fed would likely delay (tapering)" Zandi said, adding that this seems unlikely given the record number of open job positions.
Job openings in the US rose 749,000, or 6.9%, from its previous high to a new record of 10.9 million in July, according to the latest Labor Department survey.
Openings climbed the most in education and health services, followed by professional and business services, and leisure and hospitality, said the survey.
The prospect of the Fed starting to reduce accumulating new assets on its balance sheet, a process known as tapering, remains another hot topic for global markets and investors.
Powell said on Aug. 17 that the Fed is in the process of putting away its emergency tools, which was viewed as a hint that Federal Open Market Committee (FOMC) members would soon decide to begin unrolling the central bank's $120 billion monthly asset purchase program.
"Chair Powell has already strongly signaled that the Fed will begin tapering quantitative easing in the next few months. I don’t think the FOMC members will debate too strongly over which month," said Zandi.
"The Fed would like to begin tapering quantitative easing before the end of this year, and will stick to this script unless it looks like the recovery is faltering," he explained.
The Fed on Wednesday will release its projections for economic growth, unemployment, inflation, and the federal funds rate.
The latter is another question for investors, who are wondering whether the Fed might make an earlier rate hike late next year, instead of two rate hikes of 0.25% in 2023, which it previously said according to projections released on June 16.
"I think the FOMC members will continue to signal that the first rate hike will be in early 2023," said Zandi.
"This is likely when the economy will have returned to full employment and it is clear that inflation is settling back in closer to its 2% through-the-business cycle inflation target," he added.