By Jonnelle Marte

NEW YORK, (Reuters) – Both demand-side and supply-side factors contribute to U.S. inflation right now. However, most price movements currently driven by current prices may be caused by pandemic-related shifts which could subside over the long-term, Loretta Mester, President of Cleveland Federal Reserve Bank, said Thursday.

Mester, a member of a European Central Bank panel said that when responding to inflation that is short-term, policymakers should be able to differentiate between inflation that might last longer.

How much is it driven by supply shocks, and how much is it driven by the demand that would respond positively to monetary policies? Mester agreed.

Mester stated that an increase in short- and long term inflation expectations in conjunction with continued inflation may indicate that prices are changing more because of higher demand than what policymakers expect. But, Mester, a Fed official, stated that this was not her baseline forecast.

“Right now, my view is it’s pandemic related but we’ll have to wait and see,” said Mester.

Mester explained that it may take longer for some supply-side issues to be addressed by the pandemic than expected. She also said that policymakers will continue to monitor inflation risks. However, too much is not good.

“Fundamentally, if it’s supply-side driven, that’s not something monetary policy should be responding to,” Mester said, adding that officials should keep an eye on inflation expectations and other indicators to know if monetary policy is too accommodative or not providing enough accommodation.

Fed officials have signaled they could begin reducing the U.S. central bank’s $120 billion in monthly asset purchases as soon as November https://www.reuters.com/business/fed-prepared-handle-september-jobs-report-with-kid-gloves-2021-10-07.

Policymakers set a higher bar for raising interest rates, which Mester previously said could be met by the end of 2022 https://www.reuters.com/business/feds-mester-repeats-first-rate-hike-could-come-end-2022-2021-10-01 if the labor market continues to improve.