Why we will still have inflation in 2023, Harvard professor Kenneth Rogoff says

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Why we will still have inflation in 2023, Harvard professor Kenneth Rogoff says

Harvard University professor Kenneth Rogoff said on Monday why he believes inflation is not transitory and will stick around next year.

It is not easy to raise interest rates to fight inflation when public and private data is high, when the stock market is high, when housing prices are high, and when the economy is still weak, as the former chief economist at the International Monetary Fund noted on Monday. It takes a lot of stomach. He believes that the Federal Reserve will be cautious and certainly won't overshoot for now on raising interest rates, which is why he believes we'll still have inflation in 2023. Rogoff said less than a week after it was revealed that inflation rose at the fastest pace in nearly four decades in December, as rapid price gains fueled consumer fears about the economy.

The consumer price index increased by 7% from a year ago, according to the Labor Department report released Wednesday, marking the fastest increase since June 1982, when inflation hit 7.1%. In the one month from November, the CPI, which measures a wide range of goods, ranging from gasoline and health care to groceries and rents, jumped by 0.5%.

Economists expected the index to show that prices surged 7% from the year-ago period and 0.4% from the previous month.

The Federal Reserve is expected to hike interest rates as soon as March due to the eye-popping reading of the seventh consecutive month the gauge has been above 5%, and will likely lead to pressure on the government to hike interest rates as soon as March in order to combat the recent price surge. Hiking interest rates causes higher rates on consumer and business loans, which slows the economy by forcing them to cut back spending.

Chairman Jerome Powell has already signaled that the U.S. central bank will speed up its withdrawal of support for the U.S. economy in order to combat inflation which has been higher and longer-lasting than anticipated, according to Chairman Jerome Powell.

Rogoff believes that the Fed takes their 2% inflation target seriously, and added that the central bank also takes having a recession seriously. How much do they need to step on the breaks to slow inflation down? He said that he believes that the Fed will be conservative in their rate increases as the central bank has indicated.

He also pointed out that the Fed hasn't tried to raise interest rates to stop inflation for almost 30 years. He added that there is a lot of uncertainty and that it is not clear how it is going to work. Rogoff said that he believes that the Fed will have to raise interest rates more than the central bank is planning to do.

The Labor Department said that rising inflation is eating away at the strong gains and wages and salaries that American workers have seen in recent months. In December, real average hourly earnings rose just 0.1%, as the 0.5% inflation increase eroded the 0.6% total wage gain. Real earnings fell by 2.4% on an annual basis.

On Monday, Rogoff argued that the pressure for increased wages due to inflation poses a danger. He believes that the Fed and other central banks are sort of counting on being like the Bank of Japan, where inflation does not seem to go up, but it's not as entrenched here, so wages have been trailing prices and there are going to be pressures on that. If the economy comes back, it will take a lot of wage increases to bring people back, and people are feeling a lot of pricing pressure, he said.

Rogoff said that people were feeling pricing pressures last year and will likely be again this year unless the pandemic really takes a turn for the worse. He stressed that it's going to be really hard to push back on.