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Surge in inflation ‘will ultimately prove transitory’: Economist

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Consumer prices jumped 5% year-over-year in May. BofA Securities Senior US Economist Joe Song joins Yahoo Finance Live to discuss.

Video Transcript

AKIKO FUJITA: OK, let's bring in another voice into the conversation. We've got Joe Song, BofA Security Senior US Economist. Joe, you've been listening us going back and forth on how we should read the CPI print that we got this morning. How alarming is it if you look at the comparisons to 2008?

JOE SONG: Yeah, I would generally agree with Jared here that a lot of the surge in inflation that we are seeing is we think that will ultimately improve transitory, right? Obviously, another bid to the upside will start to raise some concern that this could get maybe a little stickier.

But if you dig to the numbers, a lot of it encapsulates what we're seeing in the economy with the supply constraints and the shortages that we're facing, especially in the auto sector, right? Auto prices were all very strongly and that's due to the semiconductor charges that the industry is facing, and that's leading to big surges in prices there.

And we're also seeing a huge surge in reopening demand, right, with travel spending up strongly. We're also seeing apparel prices up. I guess more people are going out so they're trying to buy more clothes. So all of that we think will, as things start to normalize, those price pressures should ease as well, so ultimately, will prove transitory.

And I think that's the way the markets are feeling as well this morning. Equity markets, initially, a knee jerk reaction was a sell off but we're, kind of, stabilizing at similar levels and the same scenario holds for the treasury market.

JARED BLIKRE: Well, let me get your take on the wage inflation part that we really haven't seen pick up just yet. We do have unemployment insurance running out for millions of people over the coming months, starting, I believe, next week. Do you see this in the future in the cards a possibility, and what would be the trigger?

JOE SONG: Yeah, I think we're starting to see nascent signs of that wage pressure in the labor market, the same story about shortages or labor supply constraints are building in the labor markets right now. You see, especially in the low wage sector like leisure and hospitality, where a lot of workers are still remaining on the sidelines.

There are probably various factors to it, still concerns about contracting COVID. There's probably some childcare issues as well, and as you mentioned, the unemployment insurance benefits. The federal program is more generous than the state program, and that may be making workers lean towards staying on the sidelines. But as you mentioned, there's about two dozen states that will start to discontinue those federal benefits early starting in mid-June.

So you could see a bigger labor supply response that could cool some of the wage pressures that we've been seeing so far. But given the strength in the economy that we're seeing through the summer, we do think that wage pressures will continue on until it starts to cool off at the later end of the year and into 2022 before you see the macro fundamentals really take hold. And that's when you will start to see a steadier wage growth and price growth moving forward.

AKIKO FUJITA: So Joe, where does this leave the Fed? We've seen the Central Bank remain pretty patient so far. But just given some of the data that you pointed to and the price pressures building, is there a real concern here that they're a little behind the ball?

JOE SONG: I think from the Fed's perspective, they are remaining patient. I think they are clearly in the camp that the inflation that we're seeing right now will ultimately prove transitory. All the Fed speakers that we've heard over the last few weeks generally lean towards this is a temporary price hike as we see these big surges in demand and some of the supply pressures that we're seeing.

That said, given that price pressures are growing much faster than what we previously anticipated heading into the summer, you are starting to hear some of the more hawkish members trying to push back and saying, maybe we need to start talking about tapering asset purchases and start to pull forward the timing of liftoff. We don't necessarily think that the core of the Fed is thinking that way. But you are starting to hear those voices get louder and louder moving forward, which raises the risk that the Fed could tiny faster than what we're currently anticipating.

AKIKO FUJITA: Joe Song, we appreciate the insight there. BofA Security Senior US Economist.