Russia’s invasion of Ukraine is likely to worsen record-high inflation as rising energy prices affect the broader U.S. economy, Federal Reserve Chair Jerome Powell told the Senate Banking Committee on Thursday.
Given the uncertainty of the war’s impact on oil markets and supply chains that are already strained, Mr. Powell said, there’s no sure way of knowing how long higher prices will persist.
“Commodity prices have moved up, energy prices in particular. That’s going to work its way through the U.S. economy,” Mr. Powell told lawmakers. “We’re going to see upward pressure on inflation, at least for a while. We don’t know how long that will be sustained for.”
The prospect of longer-term high inflation is concerning for consumers, businesses, congressional Democrats and President Biden, who predicted last summer that inflation would be temporary. Republican candidates increasingly are making inflation a top issue in House and Senate races across the country.
Mr. Powell reaffirmed the Fed’s plans to raise interest rates a quarter-percentage point at its meeting March 15-16, saying more rate increases are likely this summer. That move, aimed at tamping down demand, also will increase consumers’ costs of borrowing on big-ticket items such as car loans and home mortgages.
“I do think it’s going to be appropriate for us to proceed along the lines we had in mind before the Ukraine invasion happened,” Mr. Powell said. “In this very sensitive time at the moment, it’s important for us to be careful in the way we conduct policy simply because things are so uncertain and we don’t want to add to that uncertainty.”
Oil prices climbed this week to the highest levels since 2014.
Higher fuel prices will ripple through the rest of the economy as businesses pay more for transportation, production costs and heating, and face pressure to pass along at least some of those higher costs to consumers through higher prices. Before the war started, U.S. consumer prices rose in January at an annual rate of 7.5%.
Prices for regular-grade gasoline reached a national average of $3.72 per gallon on Wednesday, according to AAA, with predictions of hitting $4 or more by summer. One year ago, the average price was about $2.65.
Sen. Pat Toomey of Pennsylvania, the top Republican on the Senate Banking Committee, agreed with Mr. Powell that the war has created less certainty about getting inflation under control.
“I fully acknowledge nobody knows how this is going to play out, but I think it’s fair to say that this war has changed the risk profile a little bit with respect to inflation,” Mr. Toomey said.
Mr. Biden, who said last summer that high inflation would be “transitory,” has blamed rising prices in part on corporate price gouging. Many economists and business leaders say inflation has been caused by a combination of greater demand, lower supply, labor shortages and trillions of dollars in emergency pandemic aid from Washington in the past two years.
Congressional Republicans also blame the administration and Democratic lawmakers for passing a $1.9 trillion pandemic relief package last year, which came on top of nearly $3 trillion in previous pandemic aid.
The White House on Thursday panned a proposal in Congress to block Russian oil imports while restarting the Keystone XL oil pipeline from Canada and allowing more drilling on federal lands.
“We don’t have a strategic interest in decreasing the global supply of energy,” White House press secretary Jen Psaki said of the proposal to shut off Russian oil. “Less supply raises prices, and that is certainly a big factor for the president at this moment. The president is going to do everything he can to reduce the impact.”
“There’s already a lot of upward inflation pressure and additional pressure does probably raise the risk that inflation expectations will start to react in a way that is negative for controlling inflation,” he said.
“We’ve been waiting for that to happen, and it hasn’t happened,” he said.