Richmond Fed President Thomas Barkin stated today that the direction of monetary policy is quite clear in the face of strong demand and persistent inflation, but caution is advised. Barkin’s assessment highlighted the need for companies to prepare to pass on the increased costs they have already incurred to their customers.
Speaking in Greer, South Carolina, Barkin stated that the U.S. economy has remained remarkably stable despite uncertainties. He explained that strong corporate profits have supported investment and employment, and consumers have continued to spend despite price increases.
However, this resilience makes it difficult to bring inflation down. Barkin added that strong demand, combined with broad-based cost increases, is pushing prices higher.
Companies Want to Pass On Accumulated Costs to Prices
Barkin said that the companies they spoke with reported cost pressures in various areas, including health insurance, gasoline and diesel, transportation, business travel, memory chips, interest rates, and customs duties.
Barkin noted that some companies postponed price increases, believing the conflict in the Middle East would be short-lived, but questioned how sustainable this approach could be. He added that companies are now trying to pass on costs they previously incurred to their customers.
According to Barkin, businesses believe they are facing less resistance to price increases compared to the pre-pandemic era. The fact that customers and purchasing units have become accustomed to accepting price hikes is creating fertile ground for continued inflationary pressure.
A FED official stated that if the economy maintains its current trajectory, the risk to the central bank’s two main objectives outweighs the risk to inflation.
Consumer Confidence Weak, Spending Continues
Barkin noted that despite pessimism in consumer confidence, spending remained strong. He recalled that in September, annual PCE inflation was 3.6 percent, while the core indicator was 3.1 percent.
He said that the unemployment rate being 4.1 percent in October supported consumption. However, he explained that low-income households were turning to cheaper products, preferring repairs over buying new items, and continuing to spend while reducing their savings.
For high-income consumers, the wealth effect, driven by increases in stock and housing values, is prominent. Barkin noted that this group is less sensitive to prices and carries a significant weight in total spending.
There Are Two Different Risks in Artificial Intelligence
Barkin particularly highlighted the path that artificial intelligence will follow among developments that could undermine the resilience of the economy.
He said that if artificial intelligence fails to meet expectations, company investments could decrease, share prices could fall, and consumer spending, which is supported by asset values, could weaken.
In the opposite scenario, technology advancing faster than expected and replacing more workers could put pressure on employment and spending.
Barkin reiterated that strong demand and high inflation have clarified the direction of monetary policy. However, he added that steps must be taken carefully because of these risks to the future of demand.
*This is not investment advice.
