Reuters
Reuters

WASHINGTON (Reuters Breakingviews) – The nice central banker has no place in a world of high inflation. Consumer prices https://www.bls.gov/news.release/pdf/cpi.pdf in the United States jumped 8.6% in May, year-on-year. Federal Reserve Chairman Jay Powell is left with no choice but to ratchet up rate hikes, inflicting more pain on people already struggling with high food and gas prices. This is rational in the long term and mean in the short term.

Friday’s inflation figures debunked the theory – confirmed by economists polled by Reuters – that prices had stabilized in May. Instead, they hit their highest level since 1981. Grocery prices rose even more than the headline figure with a nearly 12% year-over-year increase, it was reported on Friday. the Department of Labor. Gas, a lifeblood of the US economy, is up nearly 49% from a year ago.

Powell’s only option is to hurt Americans further. Last month, he essentially ruled out rate increases of more than 0.5 percentage points at a time. With inflation rising rather than falling, he may have to consider bigger hikes – say, three-quarters of a percentage point – which will make credit card balances and mortgages more expensive, and could tip the economy in a recession.

Consumers were already in distress. An index that measures mortgage application volumes https://www.mba.org/news-and-research/newsroom/news/2022/06/08/mortgage-applications-decrease-in-latest-mba-weekly -survey fell to its lowest level in 22 years due to rising lending rates, the Mortgage Bankers Association said on Wednesday. According to Moody’s Analytics, households are spending $341 more per month on the same goods and services than a year ago.

The example of Paul Volcker might bring some comfort to Powell. Chief of the central bank from 1979 to 1987, Volcker tackled inflation which had reached 13.5% the year after his appointment and doubled interest rates to nearly 20% in just six months. Consecutive recessions ensued; the unemployment rate reached nearly 11% in 1982. Some lawmakers proposed to impeach Volcker. But a year later, inflation had fallen to 3.2%, and the economy boomed thereafter.

Powell probably won’t have to make such a big move on rates, but raising them in larger increments will still hurt average Americans. And it is unclear to what extent monetary policy will have influenced the spike in food and gasoline prices largely due to the war in Ukraine. As with Volcker, history may see Powell as a hero – but he’s on his way to making plenty of enemies in the meantime.

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BACKGROUND NEWS

The U.S. consumer price index, a measure of inflation, rose 1% in May from April and 8.6% year-on-year, the Labor Department said on June 10. Economists polled by Reuters had expected a monthly increase of 0.7% and an 8.3% jump from a year ago.

(Editing by John Foley and Amanda Gomez)

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