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The Inflation Rate Is Now The Highest It's Been Since 2008

SACHA PFEIFFER, HOST:

Federal Reserve Chairman Jerome Powell testifies before Congress today. He will almost certainly be asked about this week's inflation report. It shows consumer prices in the U.S. climbing at the fastest pace in 13 years. Powell has repeatedly said he thinks higher inflation is likely to be temporary, but he's also acknowledged that economic forecasters don't have the best track record. NPR's Scott Horsley joins us now. Good morning, Scott.

SCOTT HORSLEY, BYLINE: Good morning, Sacha.

PFEIFFER: So the Labor Department said this week that consumer prices have jumped nearly 5 1/2% in the last 12 months. That's the highest inflation has been since 2008. But especially given the pandemic, was that a surprise?

HORSLEY: It was a little bit of a surprise, certainly because the pandemic economists had been predicting higher inflation, but the actual results were even higher than forecast. Prices jumped almost a full percentage point in a single month between May and June. Now, that probably will not change the Fed's policy, though, which has been to tolerate higher levels of inflation for now, keeping interest rates near zero, pumping money into the economy, basically doing everything the central bank can to encourage a return to full employment as quickly as possible.

PFEIFFER: Jerome Powell and his Fed colleagues say that inflation is likely to fall on its own before too long. Their point being, I assume, that the central bank won't have to raise interest rates. What makes them think it will fall on its own?

HORSLEY: Well, the Fed sees a lot of this spike in inflation as a byproduct of an economy that is rapidly rebounding from the pandemic recession. You know, more people are traveling, for example, but hotels are having trouble staffing up, so hotel prices jumped almost 8% last month. Eventually, the Fed expects these pandemic-related bottlenecks to come unstuck so prices won't keep going up. In some cases, prices will come down. And we have seen some evidence of that, for example, with the price of lumber, which has fallen rather sharply from its peak in the springtime. If that's the case and if higher inflation is just a passing phase, then the Fed doesn't want to slam the brakes on the recovery, especially when there are still millions of people who are out of work.

Instead, the central bank is prepared to let inflation run hotter for at least a little while. The danger, of course, is that inflation doesn't cool off on its own but instead continues to run hot and becomes that much harder to control. There are some economists who worry that inflation has a way of sneaking up on you. Even though the Fed and the Biden administration both say they are on the lookout for warning signs, Chairman Powell has acknowledged they could be wrong, and he's added that economic forecasters have a lot to be humble about.

PFEIFFER: Scott, you mentioned lumber. I know someone who's waiting to build a deck until that person hopes lumber prices will go down. So as everyone waits to see how this plays out, it's got to be frustrating for people to be facing these higher prices.

HORSLEY: Sure. Nobody likes to pay more for gasoline or steak or even hamburger. Hamburger prices were up about 3 1/2% in June, although they are still lower than they were in June of last year. Republicans see this as an opportunity to challenge President Biden over his handling of the economy. And you're likely to hear some of that from the Republican lawmakers today and tomorrow when Powell is on Capitol Hill. Senate GOP Leader Mitch McConnell argues higher prices are partly the result of that $1.9 trillion relief package that Democrats muscled through Congress back in March.

(SOUNDBITE OF ARCHIVED RECORDING)

MITCH MCCONNELL: Families are feeling it everywhere, from the supermarket to the gas pump to the housing to the used car lot and beyond, all thanks in part to the Democrats' half-baked spending spree from the springtime.

HORSLEY: Now, the White House is certainly aware higher inflation could be a liability even if the economists in the administration think price hikes are likely to settle down before the midterm elections.

PFEIFFER: NPR's Scott Horsley, thank you.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.