The top central banker says Fed officials are failing inflation because of Uber-like ‘surge pricing’ they didn’t think was possible.

Inflation is not “temporary.” Federal Reserve officials are convinced in 2021 that rising consumer prices will not last, and that they will need to maintain near-zero interest rates to help the economy navigate COVID-19. But Neel Kashkari, president of the Minneapolis Federal Reserve, now admits it was a mistake.

“Many of us—those inside the Federal Reserve and most of the forecasters outside—have made the same mistakes in, first, being surprised when inflation rose as it did and, second, in thinking that the inflation will fall quickly. Why do we miss you?” he wrote on a Wednesday article for Medium.

Kashkari blamed the models used by central bankers to forecast inflation, arguing that they did not properly account for something called “price inflation.” He uses the analogy of Uber experience of drivers on a rainy day to illustrate this type of inflation. Rideshare companies like Uber and Lyft will offer their drivers so-called surge pricing when demand for rides increases. A price increase can increase the cost of a trip, thereby reducing demand and encouraging more drivers to work and increasing supply.

Kashkari argued that during the pandemic, the economy was hit by a form of corporate inflation due to the sharp increase in demand as the COVID lockdowns took hold, coupled with the shortages created by the broken ones. supply chain.

But unlike during rideshare companies’ price hikes, workers’ wages haven’t risen at the same rate. This dynamic causes inflation and corporate income to flywhile real wages decrease.

Kashkari said the key to the Fed’s “miss” was that last year’s inflation was driven by these price increases that the Fed’s models failed to take into account, rather than by a tight labor market or fluctuations. on consumer inflation expectations-both. common source of price increases in previous periods of high inflation.

“In these workhorse models, it’s very difficult to generate high inflation,” he explained. “We have to have a very tight labor market…or we have to assume an unpredictable inflation expectations. That’s it. From what I can tell, our models don’t seem equipped to handle a fundamentally different source of inflation, specifically, in this case, surge price inflation.

Kashkari went on to say that he believes the Fed should continue to raise interest rates “at least in the next few meetings” due to his lack of ability to accurately forecast inflation. A rate cut should not even be considered, he added, until officials are “convinced” that inflation is “well on its way back” to their 2% target rate.

“Given the experience of the 1970s, the mistake the FOMC must avoid is cutting rates prematurely and then raising inflation again,” he said, referring to the Fed’s Open Market Committee, which determines the level of interest. “It was a costly mistake.”

Kashkari added that his article was not meant as a criticism of fellow Fed officials, as he, too, was wrong about last year’s inflation.

“It is intended to be an honest examination of what we missed and why we missed it to shed light on what we need to know going forward,” he wrote.

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