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How The U.S. Is Handling The Rise In Inflation


Inflation is running hot. The Commerce Department said yesterday prices in July were up more than 4% from a year ago. But the Federal Reserve doesn't seem especially worried. For now, the Fed says they'll continue to pump large sums of money into the economy in the hopes of speeding up economic recovery and putting more people back to work.

We're now joined by NPR chief economics correspondent Scott Horsley. Scott, thanks so much for being with us.


SIMON: So the inflation reading for July is more than double the Fed's long-term target. How have they been responding?

HORSLEY: Fed Chairman Jerome Powell continues to make the case that this jump in prices is largely the result of temporary factors. And he says the Fed should not overreact to that in a way that might slow the recovery. Prices did rise less in July than they did in May and June. So it could be that inflation is peaking and we will see more modest price increases from here on out.

Now, that said, inflation has been surprisingly high for a lot of forecasters. And Greg McBride of says it could be more long-lasting as well.

GREG MCBRIDE: The Fed keeps saying that the inflation is temporary. That's their story. They're sticking to it. But the risk factors are there. When you listen to second-quarter earnings calls, it was a chorus of CEOs, one after the other, talking about how they're seeing higher prices and that they're having success in passing that on to customers.

HORSLEY: Now, Powell does say the Fed is monitoring inflation closely and is ready to clamp down if necessary. Now, that's especially if people come to expect that prices will keep on climbing. That change in expectations is what happened in the 1970s. And we did see runaway prices back then for a decade.

SIMON: Scott, what's driving inflation?

HORSLEY: A lot of this is just a mismatch between consumer demand, which has bounced back really strongly, and supply, which is still constrained. The report we got from the Commerce Department this week shows demand for stuff did ease up a little bit in July, but it's still way higher than it was before the pandemic. And demand for services, like restaurants and travel, while it has not yet fully recovered, is on the rise. Now, that's good for businesses that are glad to have more customers, but a lot of them are still struggling to staff up.

Of course, a big wildcard, Scott, is how much of this recent spike in infections tied to the delta variant is going to weigh on people's willingness to go out to eat or travel or go to concerts. There are signs of a slowdown in things like restaurant reservations and airline bookings. We do know that people tend to get more cautious about that kind of in-person spending when they're worried about their health.

SIMON: And what about the health of the broader economy? How much longer is the Fed going to keep shoring it up?

HORSLEY: Well, Chairman Powell gave this big speech yesterday, and there was a lot of buildup for it. But he didn't really tip his hand about when the Fed might start to dial back its aggressive bond-buying program. The Fed chairman suggests it could happen in the coming months if the job market continues to recover. But he didn't really offer any specifics. You know, there's been concern among investors that the stock market might take a hit when the Fed does start to scale back its bond purchases. And the central bank is trying to offer lots of advance warning so as not to spook investors. You could read that bond purchase taper, when it does come, as a vote of confidence in the economy. And McBride says it shouldn't be all that scary.

MCBRIDE: When the Fed does start the taper, it doesn't mean that they are taking steps to curtail economic growth. It just means that when it comes to pumping money into the economy, they're starting to slowly lift the foot off the gas.

HORSLEY: And there's still a lot of fuel in the economic tank. You know, Americans who are lucky enough to be working during the pandemic have socked away a lot of money, and that could bankroll future spending. Personal income actually rose pretty sharply last month, thanks to rising wages and that new monthly payout of the child tax credit.

SIMON: NPR's Scott Horsley, thanks so much.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.
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