Federal Reserve Chairman Jerome Powell stated on Tuesday in testimony before Congress that while some inflation pressures are stronger and more persistent than he expected at this stage of economic recovery, he does not expect inflation to rival some of the worst inflation periods in U.S. history. However, Powell noted that the economy still faces looming threats from the coronavirus pandemic.
"Since we last met, the economy has shown sustained improvement," Powell said in remarks before the House Select Subcommittee on the Coronavirus Crisis.
"Widespread vaccinations have joined unprecedented monetary and fiscal policy actions in providing strong support to recovery. Indicators of economic activity and employment have continued to strengthen, and real GDP this year appears to be on track to post its fastest rate of increase in decades," he added. "Much of this rapid growth reflects the continued bounce back in activity from depressed levels."
Under questioning from lawmakers, Powell reiterated that most of the recent inflation surge was caused by factors closely tied to the easing of coronavirus restrictions due to surging consumer demand following historically depressed levels last year. Powell said those factors should "resolve themselves" in the coming months.
"I will say that these effects have been larger than we expected, and they may turn out to be more persistent that we have expected," the central bank leader acknowledged. "But the incoming data are very consistent with the view that these are factors that will wane over time, and inflation will then move down towards our goals and we'll be monitoring that carefully."
The Bureau of Labor Statistics Consumer Price Index report for May was up 5% year-over-year, the highest level in over a decade as surging demand met a tight supply chain. Core inflation, which excluded volatile food and energy prices, rose 3.8% due to the increased demand for used cars as Americans begin to return to work and travel outside their homes again.
While higher inflation was expected as the economy grows, the central bank has turned more hawkish recently towards the pace of price increases, warning that interest rate hikes are coming sooner than previously expected. However, Powell and other central bankers have a mostly positive outlook on the recovering economy, but caution that the pandemic still remains a threat despite high vaccination levels.
"Progress on vaccinations has limited the spread of COVID-19 and will likely continue to reduce the effects of the public health crisis on the economy," Powell told House committee members. "However, the pace of vaccinations has slowed and new strains of the virus remain a risk."