Fed’s Barkin Says ‘Profound’ Disinflation to Check Price Gains

A “disinflationary” mindset has taken hold among U.S. businesses and consumers that will be hard to dislodge despite stronger economic growth this year, said Federal Reserve Bank of Richmond President Thomas Barkin.

“There are disinflationary pressures that are quite profound and seem to be continuing,” Barkin told an online event Monday hosted by the Maryland Bankers Association. “As long as you’ve got those disinflationary headwinds, it’s just going to be hard for businesses to believe that you’re going to have the market power to increase prices.”

Cold weather and continuing high levels of Covid-19 infections are likely to make the first quarter’s economic performance “bumpy,” Barkin said, with an improvement by the second quarter. In the second half, he saw companies likely to be calling service and restaurant workers back who have been furloughed.

Even so, firms may still struggle to meet pent-up demand from Americans who’ve delayed spending during the pandemic, Barkin said. But he argued they will hesitate to raise prices aggressively because of competitive pressures and consumer psychology.

Some investors are betting on higher inflation as the economy recovers at a quicker-than-expected pace. Policy makers have said inflation could temporarily rise above their 2% target, but minutes of their meeting last month showed they anticipate distinguishing between such one-time moves and shifts in the underlying inflation trend.

Fed’s Barkin Says ‘Profound’ Disinflation to Check Price Gains

Chair Jerome Powell may say more about the outlook for price pressures when he speaks before Congress this week.

Economists have upgraded their forecasts for U.S. growth this year after January data on retail sales, industrial production and producer prices published last week all came in above forecasters’ estimates.

Dallas Fed President Robert Kaplan said in separate remarks on Monday that economic growth for 2021 is likely to be 5% and could be even more.

“If we’re wrong, the risks are to the upside -- that we may grow faster,” Kaplan said. “We think some of that growth will be back-end loaded to the end of the year as mobility and engagement improves, we think the unemployment rate will continue to meaningfully decline and we’ll see some firming in inflation.”

Powell appears before the Senate Banking Committee Tuesday and the House Financial Services panel a day later. He is likely to repeat that the Fed is fully committed to supporting the economy, with the labor market far from its full employment goal and inflation below its 2% target.

Fed leaders have highlighted that nearly 10 million jobs have been lost since the start of the pandemic. That shortfall will weigh on prices as well.

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