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  • Writer's pictureEdward Lehman

Are inflation fears realistic? Or is it the economy reacting to re-opening?

Last week, the United States Federal Reserve said it is willing to tolerate a higher level of inflation as it works towards its goal of getting as many Americans back to work as possible.

The Fed’s preferred measure of inflation — personal consumption expenditures (PCE) — is expected to rise to 3.4 percent this year, a full percentage point higher than its March forecast of 2.4 percent.

The latest Fed projections also see inflation dropping to 2.1 percent next year, as opposed to its March call of 2 percent.

The Fed maintained that the recent rise in inflation is “largely reflecting transitory factors” such as the economy gearing back up again from its "pandemic hibernation." Any price hikes are the result of shortages and bottlenecks, and should begin to drop eventually, according to the Fed.

Vaccinations have allowed for a broader reopening of the U.S. economy. But the resulting demand, which is also being fired up by trillions of dollars from the government and record-low interest rates, is straining supply chains, fanning inflation.

U.S. retail sales dropped more than expected in May, with spending rotating back to services from goods as vaccinations allow Americans to travel and engage in other activities that had been restricted by the COVID-19 pandemic.

Car rental prices increased 12.1 percent in May. The cost of airline tickets and hotel accommodation also rose.

With vaccinations against COVID-19, trillions of dollars from the government and record-low interest rates are whipping up demand, companies are scrambling for raw materials and labor.

There were declines in sales at furniture retailers as well as at sporting goods, hobby, musical instrument and bookstores.

Retail sales fell 1.3 percent last month. Online retail sales slipped 0.8 percent.

Inflation could get a boost from the labor market, where layoffs are subsiding. Claims have decreased for six straight weeks. And employers are raising wages as they compete for scarce workers.

Recently, governors in at least 25 states, including Florida and Texas, began cutting off unemployment programs funded by the federal government for residents. These states account for about 40 percent of the economy.

For AmChamUS, all the speculation about inflation appears "noisy," and says more about the rapidity of the rebound in demand, which is welcome, rather than any signal about the long-term outlook for inflation.

AmChamUS supports federal government efforts to effectively stimulate the U.S. economy in the wake of COVID-19, while exercising monetary policy that works concomitantly with the reopening of the economy, not against it.

The reopening of the U.S. economy is clearly creating a robust job market and economic growth, as employers are offering unprecedented incentives and salary packages to ensure employees receive just compensation for work.

AmChamUS believes the overall U.S. economy can benefit from higher wages and greater compensation packages for blue collar workers across a broad spectrum of industries.

AmChamUS believes the gains made by higher wages cannot be undercut by a federal monetary policy that creates long-term inflation and drives up the cost of goods.

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