Yellen sees ‘several months of rapid inflation’ before easing, worries about impact on housing

Treasury Secretary Janet Yellen warned on Thursday that prices could continue to rise for several months, although she expects the recent spike in inflation to subside over time.

In an interview with CNBC, the cabinet official added that she was concerned about the problems inflation could pose for low-income families looking to buy a home at a time when real estate values ​​are soaring.

“We will still have several months of rapid inflation,” Yellen told Sarah Eisen in a “Closing Bell” interview. “So I’m not saying it’s a one-month phenomenon. But I think in the medium term we’ll see inflation come back to normal levels. But, of course, we have to keep a watchful eye. “

The Consumer Price Index, which measures the costs of a wide range of items, rose 5.4% in June, the fastest pace in nearly 13 years. Excluding food and energy, the gauge increased by 4.5%, the fastest acceleration in nearly 30 years. The prices that producers of goods and services receive for their products jumped 7.3%, a record high in 2010.

What’s more, house prices in the nation’s largest cities have climbed nearly 15% in the most recent measurements from S&P CoreLogic Case-Shiller.

All of this added to fears that inflationary pressures could block the aggressive US economic recovery, with escalating real estate raising fears of a bubble.

“So I don’t think we see the same kind of danger that we saw as the financial crisis approached in 2008,” Yellen said. “It’s a very different phenomenon. But I am concerned about the affordability and the pressures that rising house prices will create for families who are buying a first home or who have less income.”

Some positive signs

Although consumer surveys point to higher inflation expectations ahead, Yellen said she was encouraged by market-based measures which suggest prices will cool down in the longer term.

Despite inflationary fears, the 10-year Treasury yield, seen as a benchmark for growth, fell below 1.3% after rising one percentage point to around 1.75% from October 2020 to March 2021.

Other indicators, such as a widely used market measure of yield differences between 5- and 10-year Treasuries and inflation-linked bonds of the same duration, fell from 13-year highs observed in May.

“I think measures of inflation expectations still look fairly well contained over the medium term,” Yellen said. “Those expectations are actually a driver of pricing behavior. And so it’s important that we watch it carefully. But I basically believe, you know, that it’s something that’s going to take hold.”

Regarding Treasury yields in particular, she said it was “the market voicing its opinion that inflation remains under control”.

Yellen spoke as chairman of the Federal Reserve Jerome Powell faced House and Senate lawmakers this week over whether the Fed’s historically easy policies and congressional aggressive spending risked runaway inflation. The Fed, which Yellen once chaired, posted its balance sheet above $ 8 trillion during the pandemic, as Congress looks at its second consecutive year of a $ 3 trillion budget deficit.

Powell acknowledged that the Fed “is not comfortable” with the current rate of inflation, but he also expects this to subside as factors unique to the pandemic recede and conditions return to normal. For his part, Yellen said spending associated with the White House-backed US bailout was helping the recovery.

“I think we are seeing it having the desired effect as well as – preventing scarring and damage to families and their finances,” she said.

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