Cleveland Fed's Mester: US inflation largely reflects pandemic-related factors
The current spike in US inflation rates can be mainly attributed to both supply-side and demand-side factors. However, Cleveland Federal Reserve Bank President Loretta Mester admitted on Thursday that most of the current price changes might be driven by pandemic-related shifts that could subside over time.
Mester urged policymakers not to rush to draw conclusions. According to her, when determining how to respond to inflation, it is worth distinguishing short-term inflationary pressures from inflation that could be longer lasting. She believes that it is of utmost importance to understand how much of that increase is driven by supply shocks and how much of it is driven by demand that would respond to monetary policy. By the way, Loretta Mester will have a vote on the Fed's policy-setting committee in 2022.
The head of the Federal Reserve Bank of Cleveland strongly recommends that Fed members keep an eye on upside risks regarding inflation. This is necessary because some of the supply-side challenges caused by the pandemic may take longer to be resolved than initially anticipated.
If inflation is still driven by supply-side factors, monetary policy should not respond to it, Loretta Mester stressed. To find out whether monetary policy is too accommodative or not providing enough accommodation, officials should consider both inflation expectations and other indicators, she noted.