Yellen says substantial inflation slowdown expected next year

US Treasury secretary says work has been done on 'modern supply-side economics' for greener and inclusive future

US Treasury Secretary Janet Yellen delivered her remarks to the World Economic Forum’s Virtual Davos Agenda. Reuters

US Treasury Secretary Janet Yellen delivered a rosy outlook for the economy, with fading inflation and the potential for higher long-term growth.

While acknowledging that price rises represent “a valid policy concern”, Ms Yellen said on Friday that “it’s important to note that professional forecasters think that inflation will substantially abate next year".

She made the remarks in a speech delivered by video to the World Economic Forum’s Virtual Davos Agenda.

She also called the US labour market “exceptionally strong” and called forecasts for 3.3 per cent growth in 2022 a “stunning economic and policy achievement".

The Treasury secretary’s remarks contrast with widespread public sentiment in the US that the economy is on the wrong track, amid worries that high inflation will continue to erode the buying power of households.

While growth and employment have bounced back strongly from the collapse in early 2020 at the outset of the coronavirus pandemic, inflation has roared to an almost 40-year peak.

Consumer prices rose 7 per cent in 2021, their biggest 12-month jump since 1982, driven by supply constraints connected to the pandemic, a trade war and government stimulus meant to support families and businesses through the economic fallout.

President Joe Biden has seen his approval ratings tumble amid public dissatisfaction with the state of the economy.

A recent CBS News poll showed his rating for handling the economy was at 38 per cent, with two thirds of Americans thinking the president isn’t focused enough on the burden of inflation. Meanwhile, the University of Michigan consumer sentiment index in November hit its lowest point in almost a decade.

Ms Yellen argued that the Biden administration was seeking to boost longer-term economic growth through the application of what she called “modern supply-side economics”, which would emphasise public investments in infrastructure and the workforce, and seek to protect the environment.

“We have a clear path forward with the recently passed infrastructure package and the proposed Build Back Better plan,” she said, referring to the 10-year spending plan that’s now stuck in the Senate.

“Together these policies will promote a modern supply-side expansion that boosts long-term sustainable growth.”

The Treasury chief also reiterated her view that, while government debt compared with gross domestic product is historically high, the low interest rates means the fiscal burden is “manageable".

Ms Yellen also said that the so-called secular stagnation forces, including a surfeit of savings, that drove down rates before Covid-19 will likely continue after the pandemic.