EDB: ‘US inflation outlook consistent with prices increase perceived by local consumers’
The Puerto Rico Economic Development Bank’s (EDB, in Spanish) Center for Economic Studies confirmed in a report that the inflationary outlook in the US mainland is consistent with the increase in prices perceived by local consumers.
During a news conference, EDB President Luis Alemañy said from the lowest point recorded in June last year (-1.7%), the inflation rate in Puerto Rico has maintained an upward growth rate, reaching 3.3% in August 2021.
As of September 2021, the stateside inflation rate is at 5.4% according to the Consumer Price Index and 8.6% according to the Producer Price Index.
“The Federal Reserve System, which is the central bank in charge of establishing the monetary policy of the United States, maintains the goals of reaching maximum employment and maintaining the national inflation rate at 2%,” he said.
The Fed estimated that inflation will average 4.2% at the end of this year and that it will decline to 2.2% next year.
“The increase is due to several factors, such as interruptions and bottlenecks in supply chains, which have limited the supply of some products and services. It is also due to increases in demand as restrictions imposed to handle the pandemic are eased and economic activity and employment indicators improve,” Alemañy said.
Inflation is defined as the tendency for the prices of goods and services to rise over time. If prices increase, the purchasing power of money decreases.
“That is, the higher the prices are, the fewer things can be bought with the same money,” said Economist Gladys Medina, who is part of the EDB’s Center for Economic Studies, noting that the Consumer Price Index is an indicator that serves as a tool to measure changes in the prices that consumers pay for the purchase of goods and services, between two specific periods of time.
This group of items and services is known as the basket of goods and services.
During the news conference, Medina noted that the Consumer Price Index the Producer Price Index are being driven upward due to high energy costs.
“In the case of the Producer Price Index in September 2021, energy prices increased by 36.3%, while for consumers there has been an increase of 24.8% in the same category. However, when significant increases in energy costs are experienced as it is an essential service for society, this inflation is transferred to all sectors of the economy,” she said.
The Fed’s Federal Open Market Committee (FOMC), which is primarily responsible for setting the US monetary policy, argues that a long-term inflation level of 2% is ideal to achieve macroeconomic factors of maximizing employment, stabilizing prices, and protecting the North American financial system.
“Although it recognized that the level of inflation is ‘high,’ the FOMC agreed at its last meeting to keep interest rates close to zero [between 0% and 0.25%]. It also didn’t implement substantial changes to current monetary policy, arguing that this is appropriate until the US labor market reaches levels consistent with maximum employment and inflation at 2%,” Alemañy said.
“However, it did hint that it could begin with a ‘tapering’ or progressive reduction in the purchase of public debt bonds [and private debt with mortgage guarantees)]starting in November or December, which would last until mid-2022,” he said, adding that “the FOMC stated that they estimate that inflation in the US will average 4.2% at the end of this year and that it will decrease to 2.2% next year.”
Meanwhile, Medina said with interest rates at such low levels, “financial, commercial and individual decisions regarding saving, borrowing and investing, can have a positive impact on the island’s economy.”
“However, it remains to be seen if jobs that have to still be recovered and the restrictions on income that this implies, and that cause more money to be spent on essential goods and services such as food, fuel and housing, prices within these categories increase in the longer term,” she said.