By Howard Schneider

WASHINGTON (Reuters] – Federal Reserve Chairman Jerome Powell spoke in August to explain why high U.S. inflation will become “transitory” over time.

The jury is still out on Friday with new data showing that the personal consumption expenditures price inflation rose in September by 4.4% versus August’s 4.2%. This continues a streak of inflation at levels never seen for 30 years.

The index increased at 3.6% annually in September without taking into account energy and food costs. This is similar to the increase in the previous three months. It also indicates that prices continue rising even if some volatile items have been excluded.

Powell noted that Powell is keeping an eye on employment costs. They rose at their highest level since 2001 in the third quarter.

Next week, the U.S. central banks will meet to review its outlook on the economy and monetary policies. Officials balance the hope of supporting the economy by low interest rates as long as they can against worries that inflation might be too rapid.

This is how inflation has developed:

HIGHER PRICED PRICES IN THE FUTURE

Inflation would increase as the world economy recovers from the coronavirus epidemic, Fed officials predicted in the beginning of the year. Although some economists predicted that record-breaking federal spending would result in price hikes, Fed officials believed there would be a temporary episode. This was due to simple math.

Fed officials raised their 2021 inflation outlook at their March 16-17 policy conference. In a press conference following the publication of the economic projections and the policy statement, Powell stated that the “relatively modest” increases in inflation would be temporary. Inflation used to go up at one time, and would continue rising. That time has passed.

Inflation was at double the Fed’s target of 2% in September. Official projections went higher.

(GRAPHIC: The Fed’s inflation outlook – https://graphics.reuters.com/USA-FED/INFLATION/gkvlgxyqnpb/chart.png)

Powell’s words changed. After the Sept. 21-22 meeting of central bank policy makers, Powell stated that “as the reopening proceeds, bottlenecks and hiring difficulties and other constraints may again prove to be more severe and last longer than expected, posing upside risk to inflation.”

(GRAPHIC: The COVID inflation surge – https://graphics.reuters.com/USA-FED/INFLATION/akvezawxopr/chart.png)

Or they will worry that they misunderstood.

Powell and others believe it will still happen. But, Powell is confident that the timeframe for this to occur is much longer than initially anticipated. The September data show little evidence of slowing.

BROAD-BASED INCREASES

Powell explained in his August comments that “the spike in inflation so far is largely due to a relatively small group of goods or services that have directly been affected by both the pandemics and the reopening the economy.”

He pointed out that the alternative inflation measures that toss out strong price influences have remained mild. However, these measures have moved higher in the past few months due to wider price increases.

(GRAPHIC: Broad based inflation – https://graphics.reuters.com/USA-FED/INFLATION/klpykzrowpg/chart.png)

WANTING INFLUENCE FROM OUTLIERS

Powell explained that Powell and other policymakers have begun to observe a moderation in some instances.

Powell used the familiar example of second-hand autos. Prices for used vehicles rose at an unprecedented rate over the summer. However, that pace has actually decreased. He also said that durable goods prices should be lowering, but that this hasn’t happened yet. On an annual basis, inflation for durable goods increased 7.3% in September compared to 7% in August.

(GRAPHIC) Pressure from the top? – https://graphics.reuters.com/USA-FED/INFLATION/klvykzrrwvg/chart.png)

WAGES

Powell declared in August, “Today, we do not see any evidence that wage increases could be dangerously high,” This will be closely monitored.

In September’s three-month period, compensation costs went up 1.3%. It was the biggest increase since 2001. Fed officials are now assessing whether or not the process of adjusting labor demand and supply is at an end. On an annual basis, compensation costs in the food- and lodgings industries that were hardest hit rose by more than 7.7%.

(GRAPHIC: Wage and benefit costs – https://graphics.reuters.com/USA-FED/INFLATION/zdvxorebnpx/chart.png)

EXPECTATIONS

Powell explained that long-term inflation expectation have moved less than real inflation, or near-term anticipations. He suggested that household, market, and business participants think that the current high levels of inflation are transitory. However, measurement is more uncertain. Their drift has been higher and that would indicate that they are likely to continue rising.

(GRAPHIC: Inflation expectations ratchet higher – https://graphics.reuters.com/USA-FED/INFLATION/gdvzywakwpw/chart.png)

GLOBAL DISINFLATIONARY ACTORS

Powell’s speech in August was perhaps the most faith-based. He spoke about the global impact of technology and demographics on anchoring prices.

(GRAPHIC: Global disinflation – https://graphics.reuters.com/USA-FED/INFLATION/xmvjolddxpr/chart.png)

Powell stated that “while the global disinflationary forces are expected to change over time, there’s little to suggest they have suddenly reversed” or diminished. As the pandemic ends, it seems that these factors will still be a factor in inflation.That truth depends on many factors, including the flow of capital from China to China as the rule of Chinese leader Xi Jinping changes, and climate change mitigation efforts which are still in the infancy stages.