Yellen Puts Inflation Blame Elsewhere, Defends Biden Stimulus

(Bloomberg) -- U.S. Treasury Secretary Janet Yellen defended the size of the Biden administration's stimulus package that many blame for fueling the fastest inflation in four decades, though she conceded that describing rising prices as “transitory” was a mistake.

“You have to decide what's the biggest risk that you face, and address it effectively,” Yellen said in an interview Wednesday with Bloomberg News. “The American Rescue Plan was sized to do that, and it accomplished that mission.”

The Treasury chief argued that other countries with much weaker economies than the U.S. are also dealing with high inflation. That suggests, she said, that most of the rise in inflation was due to a shift in demand from services to goods and to disturbances in the supply of goods caused by Covid-19.

Yellen predicted full-year inflation this year would drop to around 3% from 7% in 2021, in line with what private forecasters are saying, though similar projections of slowing inflation failed to come true in 2020. She said that her use of the word “transitory” through much of 2021 to describe her outlook for inflation was not ideal.

“I think people heard ‘transitory,' and to them it meant a couple of months,” she said. “Maybe a better word could have been chosen.”

Her comment follows Federal Reserve Chair Jerome Powell's remark in November that it was “probably a good time to retire that word.”

Yellen said she would closely watch month-over-month inflation figures, as they are more useful at revealing whether price pressures are subsiding. By that measure, she expects inflation will drop in the second half of the 2022, and will reach “levels consistent with around 2%-2.5% by the end of the year.”

She reiterated a strong defense of the ARP, which provided $1.9 trillion to help households, businesses and states weather the economic fallout from Covid-19.

During the pandemic, unemployment had rocketed to almost 15% from 3.5% in February 2020. When the stimulus law passed in March 2021, the level was still at 6.2%, and the annual increase in the consumer price index stood at 1.7%. By December, unemployment had fallen to 3.9%, but inflation skyrocketed.

“There really wasn't any good reason to think a stimulus that would lower unemployment to that general range again would cause as much inflation as we've had,” she said.

Many economists, including those aligned with Democrats, have disagreed. “I don't know how you argue that you got dramatically faster real growth, but you didn't get any faster price growth,” Jason Furman, chair of the Council of Economic Advisers under President Barack Obama, said of the stimulus package in September.