Central banks may need to raise interest rates further to keep an energy shock from spreading to other prices, according to remarks published by the Brookings Institution on Nov. 5.
Inflation has not fully returned to the 2% target, while demand in the United States is still fairly strong. The war with Iran is disrupting energy markets and pushing up oil prices.
The remarks appeared in the recording “What really drove post-pandemic inflation?” The supplied excerpt did not identify the speaker, whose comments linked the current energy disruption to difficulties policymakers faced during the pandemic.
“Measuring the economy in real time is difficult.” The pandemic experience showed how the information available when officials make decisions can differ from the picture that emerges after economic estimates change.
The economy appeared weaker during the pandemic than it does in hindsight. Policymakers confronted high inflation alongside apparently weak activity, a combination that made the rise in prices look like a problem with supply.
That distinction mattered to the explanation of inflation. Weak activity appeared alongside rising prices in the information officials had at the time, giving them a different picture from the one available today.
Initial estimates of gross domestic product, a measure of the goods and services an economy produces, were later revised upward. The revised figures showed stronger activity than policymakers had initially seen.
With that stronger activity now visible, demand appears to have played a larger role in inflation than the earlier figures indicated. The account connected that reassessment to changes in economic measurement.
Better information at the time might have led policymakers to respond differently, and inflation might have been lower. The remarks framed both outcomes as possibilities, leaving open how policy decisions would actually have changed.
The speaker then drew a comparison with the current situation. The disruption to energy markets comes while inflation is still above target and U.S. demand remains fairly strong, rather than after inflation has fully returned to target.
The concern is that the energy shock could spread beyond energy and affect other prices. Such a spread could make inflation more persistent than central banks would like, creating a reason for further interest-rate increases.
“They might actually have to increase interest rates even more.” The excerpt gave no size or timetable for a possible increase and did not identify any central bank as having decided to raise rates.
