SARAH MCCAMMON, HOST:
Inflation is certain to be on the agenda as the Federal Reserve meets next week to discuss monetary policy as well as the U.S. recovery from the pandemic. Yesterday, we learned that consumer prices rose 5% from May of 2020 to May of this year. NPR's chief economics correspondent, Scott Horsley, says part of the reason was an increase in consumer demand.
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SCOTT HORSLEY: In many cases, that demand is bouncing back faster than expected, faster than a lot of businesses can catch up, so that's putting upward pressure on prices. And, frankly, a lot of consumers are more than willing to pay.
MCCAMMON: It's the sharpest inflation increase in more than a decade. And to talk about this, we're joined by Donald Kohn, the former vice chair of the Federal Reserve Board. Good morning.
DONALD KOHN: Good morning, Sarah.
MCCAMMON: OK. So what kind of response are you watching for from the Fed next week?
KOHN: Well, I think the Fed has a story and analysis of these inflation data that it's going to stick to. And that analysis is these are temporary inflation pressures - transitory is the word they keep using - and they result from the kind of increase in demand that Scott was just talking about, but also some constraints on the supply side. Supply chains have been disrupted by the effects of the pandemic. People are slow getting back into the labor force, putting pressure on wages and demand, and those things will ease over time. So the Fed is expecting this high inflation to continue a little while, but then to ease back off towards a more normal 2%-ish as the year goes on.
MCCAMMON: Right. And on inflation, the Federal Reserve chair, Jerome Powell, hasn't seemed terribly worried. Now we are seeing these numbers. Should he be more concerned?
KOHN: Well, I think he should acknowledge that the inflation pressures that we're seeing have been probably more intense than they thought they would be. But I don't think he should back off his basic story, which is, however intense they are, they will abate; they will ease off as the year goes on. Now, I do think the risks are a bit more on the upside. So I've been surprised at how intense these price pressures are, but I think the basic story is still right. The question is he'll have to - the Fed will have to keep a close watch on whether the increase in supply, the re-channeling of supply chains, people re-entering the labor force, happen as they expect and therefore take the pressure off the wages and prices. So I think he should acknowledge that the inflation is perhaps a little higher than they anticipated...
MCCAMMON: Right.
KOHN: ...And that they're alert to the upside risks.
MCCAMMON: So lots to watch in the longer term. But in the short term, heading into the summer, what should consumers expect as far as price increases?
KOHN: So I think they should continue - expect to see price increases continue for a few more months in pretty strong fashion. Some prices - and used cars, new cars - are response to very sharp cutbacks in supply chains - that chip shortage in new cars, for example. And as that eases, they - I think they can expect to see those prices stop rising quite so rapidly. And some prices are just catching up to where they were in January, February 2020 - hotels, airline fares, restaurant meals - and I think we can expect to see a push up there and then a kind of a leveling off.
MCCAMMON: Yeah. What about for workers? We've heard about worker shortages. Is any of this inflation going to turn into higher wages for them?
KOHN: Well, I think it's already turning into higher wages for some workers. So where there are worker shortages, then businesses are appropriately bidding for those workers by raising wages. We see stories about bonuses being paid for new hires, bonuses being paid to people who bring their friends or acquaintances in to work. So yes, I think wages will continue to go up as long as these shortages are there. The key issue will be what happens after labor force - labor comes back in. Will the wages continue to rise then?
MCCAMMON: Right. And briefly, in 30 seconds or so, in the months ahead what would you need to see to feel confident that this recovery is lasting?
KOHN: Oh, I think we will - I'm confident that the recovery will last. I think we'll need to see continued increases in sales, continued increases in employment. And that will happen. I mean, people are feeling better. Vaccines are out there. So they're - that - the recovery will continue. The issue will be - how much pressure will that put on prices?
MCCAMMON: Donald Kohn is the former vice chair of the Federal Reserve and a senior fellow at the Brookings Institution. Thanks so much for your time.
KOHN: Thank you for having me on. Transcript provided by NPR, Copyright NPR.