Despite Inflation Surge, the Fed Should Keep Steady
The central bank’s gradual and patient approach remains on target, even as a wage-price spiral looms large.
Steady as she goes.
Photographer: Pool/Getty Images
A further spike in U.S. inflation in January — prices were 7.5% higher than a year ago, the fastest increase for 40 years — was the last the thing the Federal Reserve wanted to see as it weighed its next moves in monetary policy. It had led investors to expect a very gradual increase in interest rates starting next month. Already under pressure to move faster and more boldly, the central bank will now need to think hard about its plans and its messaging.
The new inflation numbers — surprising as they were to most analysts — don’t call for a wholesale shift in strategy. It’s still true that the economy is grappling with unprecedented supply-side disruptions as well as with last year’s incautious fiscal stimulus. If the pandemic subsides, as is widely expected, supply will recover and the economy will come into better balance. In other words, the spike in inflation will indeed prove transitory to some extent. The question is how much.