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Treasury Secretary Yellen’s Admission of Error Shows Washington’s Determination to Tackle Inflation

A recent admission of error from US Treasury Secretary Janet Yellen concerning near-term inflation trends signals the Biden administration’s strong determination to tame surging price rises.  

Last Tuesday Yellen told CNN’s Wolf Blitzer that her optimistic inflation forecasts from last year had proven to incorrect.  

“I was wrong then about the path that inflation would take,” said Yellen. “There have been unanticipated and large shocks that have boosted energy and food prices, and supply bottlenecks that have affected our economy badly that I didn’t fully understand.” 

In 2021 both Yellen and US Federal Reserve Chair Jerome Powell repeatedly made statements to the effect that inflation would be a transitory phenomenon. They argued that inflation was driven primarily by factors related to the Covid pandemic, such a supply chain challenges and the unleashing of pent-up demand.  

In March last year Yellen said to ABC News that further inflation was only a “small risk,” and that she did not expect it to be a problem in future.  

Source: U.S. Bureau of Labor Statistics

Since the start of 2022 however, US inflation has risen to its fastest clip in more than four decades, as Russia’s military actions in Ukraine and renewed Covid lockdowns in the Chinese financial hub of Shanghai contributed further to global economic uncertainty. 

In March the consumer price index (CPI) rose to 8.5%, for its highest level since 1981. Inflation eased to 8.3% in April, yet still remained close to the 40 year high as well as above consensus expectations. 

Randall Kroszner, a former Fed governor and now an economics professor at the University of Chicago, said in early May that the surge in core inflation was especially troubling for US Fed officials.  

“That is where you look for evidence that inflation is becoming entrenched,” said Kroszner in an interview with The Guardian.  

These inflation levels have already prompted the Fed to take action, with the approval of two rate hikes since the start of the year for a cumulative increase in the target interest rate of 75 basis points.  

Powell is expected to push through with at least two more 50 basis point increases in the near future – a development already factored in by financial markets.  

When minutes from the most recent meeting of the Fed’s open markets committee indicated that officials backed further 50 basis point hikes, US stocks actually staged a rally since the tip offs were in line with expectations, as well as short of the 75 basis point hike that many feared from a hawkish Powell.  

Yellen’s frank admission of error – a rare move for any cabinet-level official – is a strong indication of the deep concern that the Biden administration currently also feels with respect to rampant US inflation. 

The US executive is now also intent upon adopting its own inflation-combating measures to complement the series of rate hikes from a hawkishly inclined Federal Reserve.  

“Inflation is the No. 1 concern for President Biden,” said Yellen last Tuesday, pointing specifically to Covid and Russia’s invasion of Ukraine as key drivers of unyielding price gains.  

On that same day both Yellen and Powell met with President Joe Biden to discuss measures for combating inflation.  

Yellen subsequently told CNBC’s Becky Quick that these measures would cover a gamut of key areas targeting the needs of everyday Americans, including prescription drugs costs, utility costs and oil production.  

“The president emphasised his intention to do everything he can to lower the costs that Americans face for important items in their budget,” said Yellen.