ANKARA (AA) – A sharp increase in inflation in the US is likely to remain temporary before settling around the Federal Reserve’s target, Moody’s said Monday.
“Our baseline expectation is for headline inflation to rise temporarily, but ultimately settle slightly above 2%, supported by a steady labor market recovery,” the global rating agency said in its Credit Outlook report.
“Eventually supply increases in response to higher prices, and demand growth subsides,” it added.
Personal consumption expenditures (PCE) price index, the Fed’s preferred inflation indicator, rose 3.6% in April, from the same month a year ago. Core PCE index, which excludes food and energy, was up 3.1% year-over-year, the Department of Commerce announced Friday.
Consumer Price Index (CPI), another major inflation indicator, jumped 4.2% in April, marking its sharpest increase since September 2008. Producer Price Index (PPI) soared 6.2% in April – the largest increase since 2010.
Moody’s said it expects higher PCE and CPI inflation readings over the coming months with reopening in US economy, which will create reversal from last year’s price declines, surging demand, and rise in energy prices.
The agency, however, said rising prices “eventually will subside,” adding, “Steep increases in commodity prices are not uncommon after disruptive global recessions.”
Moody’s noted that markets and investors are worried amid rising inflation as the Fed keeping interest rates near-zero levels will cause overheating in the American economy.
“The Fed’s view is that while economic activity is normalizing quickly, the evidence of accelerating inflation is insufficient to be worrisome. Indeed, the Fed has communicated that it will look through transitory inflation and let inflation exceed 2% until its goal of 2% average inflation over the long run is met,” it said.
The Fed Chair Jerome Powell has repeatedly indicated in recent months that the central bank will allow inflation to climb slightly above its 2% target to revive American economy from the pandemic until raising interest rates, which is not expected to come until late 2023.
Powell also emphasized regaining full employment in the US labor market would be a major factor before the decision of making a rate hike.
Source: Anadolu Agency