KC Fed President: Policymakers Should Stay Flexible as Economy Works Toward New Equilibrium

The next question — will supply constraints impede growth? — is a little more complicated. There are concerns about shortages of labor, raw materials and transportation services. As for labor, how quickly people return to work depends on pandemic-related factors, such as availability of childcare, enhanced unemployment benefits and fear of getting sick.

“As the pandemic fades and time passes, these factors will reverse labor constraints,” she said, adding that some people, particularly those close to retirement, may have left the workforce entirely.

Some of the shortages of materials and transportation may be resolved yet this year, but other shortages will take much longer to work out. George pointed to the problems with computer chips as one area where recovery will take longer because there’s a long lead time required to ramp up production.

The rapid shift in spending from services to goods during the pandemic led to a surge in imports backing up traffic in U.S. ports, which contributed to a global shortage of shipping containers. “A shift in consumption patterns back to services may help alleviate these delays, but it’s not yet clear when that might occur,” George said.

Increased productivity could help companies meet higher demand, but George said predicting evolution of different sectors can be difficult to forecast, especially because it develops unevenly across the economy. For example, restaurants became very productive — measured by output per hour of work — as they shifted to take out business, but that will likely change as consumers dine in. Other industries, like retail, adopted more self-checkout, which will likely be a more permanent increase to productivity.

“Let me turn to the third question, which is how will the dynamics of a strong economy and supply constraints affect inflation?” she said. Inflation over the last 12 months ending in April, which is measured by the Consumer Price Index, increased 4.2%, the fastest pace in a decade. She said many of the factors that boosted inflation over the past year will fade with time. What inflation looks like in the medium term — the next three to 10 years — is less certain.

For example, during the pandemic, the average price of a gallon of gasoline fell to $1.87. As of this April, demand has recovered as the economy reopened, and the average price of a gallon is $2.96, about equal to the average price over the last decade.

“Normalization in the price of gasoline contributed almost a percentage point to the overall rate of inflation,” she said. Other industries that took big hits in the early pandemic, like air travel and hotel accommodations, saw prices rebound as well, which also contributed to inflation. “A normalization of prices depressed by the pandemic doesn’t tell the whole story, though. Other sectors have seen prices jump far above pre-pandemic levels as supply constraints have developed against the backdrop of robust demand.”

Automobiles are a good example because production disruptions have contributed to higher new-car prices, which has had even larger spillover effects in the used car and rental car markets.

“Those kinds of bottlenecks, though, seem likely to clear over time, and prices to stabilize. Expecting these price pressures to ease, however, does not ignore the potential for more persistent inflation pressures over the long term,” George said. “It can be difficult to distinguish between a string of seemingly idiosyncratic bottlenecks and a broader-based lack of capacity. In the end, the persistence of any step-up in inflation will ultimately depend on the price and behavior of firms and workers.”

The Federal Open Markets Committee, which determines monetary policy and of which George is a member, is paying close attention to inflation, especially since it adjusted its policy framework last year. Prior to the pandemic, prices didn’t show signs of inflation despite the economy running near its capacity.

“As the economy works its way toward a new equilibrium, policymakers will be well served to take a flexible approach to monetary policy decisions, in my view,” George said. But for now, she expects the present accommodative policy to continue.

Katie Dehlinger can be reached at

Follow her on Twitter at @KatieD_DTN

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