The Fight Against Inflation

In an IPR lecture, Raphael Bostic describes challenges in battling inflation

savings due to lower spending and the federal response, Americans had more money in their accounts. However, with factory closures and sick workers, there was also a labor shortage and delays in production. As a result, the U.S. economy experienced a sharp drop in production— the largest since World War II.

“That imbalance in the labor market mirrors an imbalance between aggregate demand and supply for goods and services throughout the economy,” he said. “Our persistently elevated rate of inflation is a direct result of that imbalance.”

At an October 5 IPR Distinguished Lecture, Raphael Bostic, president and chief executive officer of the Federal Reserve Bank of Atlanta, outlined the reasons behind the nation’s surging inflation, what research and history show about combating it, and the Federal Reserve’s efforts to build an economy that works for everyone.

“In these circumstances, monetary policy assumes enormous importance because it is our bulwark against inflation,” he told 130-plus attending the virtual lecture.

Bostic is one of 12 regional Federal Reserve Bank presidents and the first African American appointed to lead a Federal Reserve bank. He is responsible for all of the Atlanta Fed’s activities, including monetary policy, bank supervision and regulation, and payment services. Additionally, he serves on the Federal Reserve’s chief monetary policy body, the Federal Open Market Committee (FOMC).

In welcoming him, IPR Director and economist Diane Whitmore Schanzenbach noted his work published in leading economic, public policy, and planning journals, and said, “He’s also one of the nation’s leading thinkers on the economic impact of racism in the United States.”

For the last seven months, the FOMC has been raising the federal funds rate to curb inflation. But what’s behind rising inflation? It comes down to two main drivers of inflation, according to Bostic.

First, he explained that people’s demand for items like furniture and electronics surged during the COVID-19 pandemic as more people stayed home, and thanks to improved

The second driver involved challenges abroad that have been impeding progress. Bostic pointed to Russia’s invasion of Ukraine, which led to a rise in gas prices, and a severe drought in China interrupted supply chains and had an impact on its exports.

Improving the supply chain, therefore, could help reduce inflation, Bostic said, but the CFO Survey shows supply chains still face challenges getting materials.

By raising interest rates, Bostic pointed to how the Fed is seeking to balance economic activity and reach its long-term goal of low and stable inflation—or 2% annually as measured by its preferred indicator, the Personal Consumption Expenditures (PCE) price index. As it takes hold, the central bank expects consumer demand to fall.

Bostic sees signs that the Fed’s policies might be working. He described reports that low-and-moderate-income consumers have begun purchasing cheaper goods, which gives the supply chain time to recover from an increase in demand.

“The strength of labor markets will wane, and economic activity will weaken, which is fundamentally necessary to reduce inflation,” he said.

Raphael Bostic is president and chief executive officer of the Federal Reserve Bank of Atlanta. Diane Schanzenbach is the Margaret Walker Alexander Professor and an IPR fellow; she directed IPR until July 2023.