The biggest surge in U.S. inflation in 13 years could stretch into 2022 owing to persistent shortages of labor and materials, especially if the delta coronavirus strain delays the full reopening of the economy.
That’s one of the big takeaways from the minutes of the Federal Reserve’s last big meeting in July.
At the two-day gathering, “most” members of the Fed’s strategy-making group said it be would be appropriate to start withdrawing support for the U.S. economy before the end of the year. The central bank adopted a series of measures early in the crisis to keep interest rates near zero to spur economic growth.
The economy is growing at an accelerated pace, but Fed VIPs also highlighted the fresh uncertainty posed by the delta variant and the possibility that it could exacerbate widespread shortages in the economy that are constraining growth. These shortages have also contributed to big price increases and the highest rate of inflation rate since 2008.
“Many participants remarked that uncertainty was quite high, with slowing in progress on vaccinations and developments surrounding the Delta variant posing downside risks to the economic outlook,” the minutes said.
Delta was mentioned six times in the Fed’s summary of the July meeting vs. not a single mention in the June minutes.
“The threat from delta crops up several times in the minutes, and presumably if the meeting were to be held today it would be even more prominent in the discussions, given the surge in cases since late July,” said chief economist Ian Shepherdson of Pantheon Macroeconomics.
Senior Fed officials acknowledged in June that inflation could stay higher for longer than they had previously assumed because of widespread shortages.
While theses shortages are expected to ease once the economy returns to normal, Fed officials were more pessimistic in July than they had been just a month earlier as to when the bottlenecks would go away.
“Participants generally saw supply disruptions and labor shortages as likely to persist over the second half of the year,” the minutes said.
Delta’s impact be heaviest on the labor market. Up to 9 million Americans who would have been working if there hadn’t been a pandemic are still absent from the labor force. A large chunk of them are too fearful of the virus to return.
A lack of labor has forced many companies to raise wages to try to attract workers. When that’s failed, some have had to cut production or even reduce the amount of time they are open. Now it could even be the case that some companies delay hiring until they see how the delta surge plays out.
“The spread of the delta variant may temporarily delay the full reopening of the economy and restrain hiring and labor supply,” the Fed minutes said.
MarketWatch Interview: Fed’s Bullard says delta COVID variant won’t derail economy
The ongoing shortages of labor and materials, Fed officials admitted, also “complicate the task of interpreting the incoming data” to determine when inflation will start to decline and how quickly.
The Fed for months had predicted inflation would return to pre-crisis levels of 2% or less by the end of this year before raising its forecasts.
Most Fed members are still sticking to that script, but now the Fed doesn’t expect that to happen until some time in 2022.