U.S. Inflation Rate Likely Will Fall to 2% by 2022's End, Treasury Secretary Yellen Says

Today's red-hot pace of inflation likely will cool to about 2% by 2022’s end, a third of its current rate, according to Treasury Secretary Janet Yellen.

That would put price increases within the long-term goal set by the Federal Reserve and reduce the upward pressure on mortgage rates. When inflation is high, the yields on bonds, including the mortgage securities where most U.S. home loans end up, increase as investors demand higher returns.

“I expect inflation throughout much of the year – 12-month changes – to remain above 2%,” Yellen said Thursday in an interview with CNBC. “But if we’re successful in controlling the pandemic I expect inflation to diminish over the course of the year and hopefully to revert to normal levels by the end of the year, around 2%.”

Inflation started surging last year when the pandemic caused bottlenecks in global supply chains as nations that ship goods and materials to the U.S. struggled to contain Covid-19 infections. While the U.S. declined to shut down its economy in response to the pandemic, with the exception of the early months, other countries were more willing to limit fatalities by enacting strict public health policies. The 860,000 Covid-19 deaths in the U.S. represent 15% of global deaths, the biggest share of any nation, according to data from Johns Hopkins University.

Taiwan, one of the largest chip makers in the world, had lengthy lockdowns to reduce transmission of the disease, causing prices to skyrocket in the U.S. for goods that rely on semiconductors, such as new cars.

Homebuilders who have relied on China – a nation known for its "zero covid" approach – for materials such as floor tile and asphalt roof shingles have also struggled with shortages. Competition for a limited supply of building materials helped to boost the median cost of a new home by 25% since the start of the pandemic, according to Census Department data.

The U.S. consumer price index rose 7% in the 12 months through December, the most in 39 years, led by a 50% spike in gasoline and a 37% gain in used cars, Labor Department data released last week showed. That’s likely to keep the Federal Reserve on pace to raise its benchmark rate in the first half of 2022, according to a survey of CME futures traders, who put the probability of a 0.25% to 0.5% March hike at 88%.

Yellen, who was chairman of the Federal Reserve during the Obama administration, declined to comment when asked what the central bank should do – a change from the approach of the last administration when President Donald Trump berated the Fed chairman he appointed, Jerome Powell, on Twitter to raise the central bank’s benchmark rate, calling members of the policy-setting Federal Open Market Committee “boneheads” and “enemies” of the U.S.

“I’m not going to comment on what the Fed should do,” Yellen said in the interview. “They have a dual mandate, which is to keep the labor market strong and to make sure the economy continues to grow while bringing inflation down and I have confidence in their ability to make appropriate judgments about what that takes.”

Asked what the Biden administration could do to alleviate inflationary pressures, she pointed to the administration's ongoing efforts that began last year to make sure goods got out of shipping containers quickly at the nation’s biggest ports and onto trucks to restock shelves. That averted a shortage of goods for Christmas gift-buying that some economists had warned about.

“For our part, there are things that we can do and are trying to do to boost labor’s supply to make sure state and local governments have the resources they need to deal with the pandemic, to keep schools open, things that will make it safe feel, feel safe for people to go back to work and of course, the ports and we’ve tried to take steps to facilitate, for example, the number of people who have licenses to engage in trucking, but the Fed has an important role to play here as well,” Yellen said.