Fed officials say "temporary" inflation surge may be longer than thought

© Reuters. FILE PHOTO: Federal Reserve Board building is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis

By Howard Schneider

WASHINGTON (Reuters) - A period of high inflation in the United States may last longer than anticipated but should still ease over time as the economy settles back to normal, two U.S. Federal Reserve officials said on Wednesday.

The comments from Fed Governor Michelle Bowman and Atlanta Federal Reserve bank president Raphael Bostic are the latest to try to reset public expectations around a price surge U.S. central bankers have largely characterized as transitory.

That remains the case, Bostic said in an interview on National Public Radio's Morning Edition, but "temporary is going to be a little longer than we expected initially...Rather than it being two to three months it may be six to nine months."

Prices for goods like lumber and used cars have pushed some measures of inflation to multi-year highs, with the consumer price index showing a 5% annualized increase in May, the fastest since 2008. Though some prices have begun to ease already, the higher prices have registered among elected officials, and forced the Fed to begin thinking about how to ensure prices don't spiral too high or too fast.

Bowman in remarks to a Cleveland Federal Reserve bank conference said she agrees prices are being driven by clogged supply chains and surging demand as the economy reopens, factors that should ease.

But she put no frame around when that might happen, saying that "it could take some time," and would need to be closely watched as the Fed sets policy.

Fed Chair Jerome Powell and other policymakers have staked their current outlook on a presumption that the surge in prices seen as the economy reopened would ease on its own, allowing the Fed to hit its 2% inflation target on average over time.

Powell told a U.S. congressional committee on Tuesday that recent high inflation readings resulted from a "perfect storm" of circumstances related to the reopening, and would abate.

How quickly that happens, however, may influence the Fed's upcoming decisions about when to begin reducing its $120 billion in monthly bond purchases, and eventually raise interest rates.

The Fed has struggled before with "transitory" inflation issues lasting longer than hoped. In 2016 and 2017, weak pricing across a series of goods - oil, cellphones and pharmaceuticals - held headline inflation lower than anticipated.

That was also explained away as a temporary shock driven by specific industries.

The risk is that over time, those temporary factors are seen as more permanent and start to shift public psychology about prices in ways that can leave actual inflation entrenched at either too low or too high a level.

Some Fed officials already are pushing for a faster tightening of monetary policy based on the inflation they see coming. Others have begun to cite concern about asset bubbles and financial stability as a possible reason to move more quickly on tightening monetary policy.