WASHINGTON -- Treasury Secretary Janet Yellen warned that the U.S. is likely facing a prolonged period of elevated inflation, while the World Bank sharply lowered global growth forecasts and flagged a risk of recession in many countries.
The World Bank, in a report, projected several years of high global inflation and tepid growth reminiscent of the stagflation of the 1970s. Ms. Yellen told lawmakers that the White House would likely revise upward its U.S. inflation forecast -- which already showed prices rising this year at nearly twice the prepandemic rate.
"I do expect inflation to remain high, although I very much hope that it will be coming down now," Ms. Yellen said, adding that the Biden administration was updating its forecast from March that inflation would average 4.7% this year. In recent months, consumer inflation has trended above 8%.
"The numbers aren't locked in, but it's likely to be higher" than the initial 4.7% forecast, she said.
Citing the damage from Russia's invasion of Ukraine and the Covid-19 pandemic, the World Bank said global growth is expected to slump to 2.9% in 2022 from 5.7% in 2021, significantly lower than its January forecast for 4.1% growth.
For the U.S., the bank forecast growth to slow to 2.5% in 2022, 1.2 percentage points below previous projections, and for inflation to remain above 2% -- about where it stood before the pandemic -- at least until 2024. New U.S. inflation data, to be released Friday, are expected by economists to show the annual rate holding steady at 8.3% in May, near a 40-year high.
Overall, the World Bank found in its latest Global Economic Prospects report that current economic conditions resemble the high inflation and weak growth -- so-called stagflation -- of the 1970s, when oil shocks, high federal spending and loose monetary policy caused inflation to soar.
"Several years of above-average inflation and below-average growth now seem likely," David Malpass, president of World Bank Group, told reporters. "The risk from stagflation is considerable."
Mr. Malpass, selected for his post under the Republican Trump administration, also said recession will be hard to avoid for many countries as growth is hampered by the war in Ukraine, pandemic lockdowns in China and supply-chain disruptions.
Meanwhile, a Commerce Department report Wednesday showed imports into the U.S. fell in April for the first time since July, suggesting domestic demand eased in the face of higher prices. Falling imports and rising exports caused the trade gap in goods and services to fall 19.1% from the prior month.
Rising prices for gasoline, groceries and other goods have become a source of frustration within the White House, as many Americans report dim views of the economy despite low unemployment ahead of the midterm elections. Many economists see high inflation as caused by a rapidly recovering economy in the past year facing supply and labor shortages.
The Federal Reserve has already started sharply raising interest rates to try to rein in inflation, with some economists starting to worry that the efforts to cool the economy could trigger a recession.
Ms. Yellen, a former chair of the Fed, has faced scrutiny from Republicans in recent weeks over inflation. She said in a television interview last week that she had been wrong last year about the path that inflation would take, while excerpts of a coming biography state that she harbored concerns that Democrats' $1.9 trillion Covid-19 relief package could exacerbate rising prices.
During her testimony before the Senate Finance Committee, Ms. Yellen said she didn't anticipate the persistence of Covid-19 and the economic disruptions caused by Russia's invasion of Ukraine. She and other economic policy makers, including Fed Chairman Jerome Powell, repeatedly referred to inflation as "transitory" last year.
"So as Chair Powell indicated himself, both of us probably could have used a better term than transitory. There's no question that we have huge inflation pressures, that inflation is really our top economic problem at this point, and that it's critical that we address it," she said.
Ms. Yellen has warned in recent months that Russia's invasion of Ukraine is hampering access to food and fuel, raising prices and posing significant risks to the global economy.
To address the threat of inflation, Ms. Yellen pointed to the efforts at the Fed to tamp down demand. She said several Biden administration priorities in Congress -- including lowering the cost of prescription drugs, incentivizing clean energy production and bolstering semiconductor manufacturing -- could help ease inflation.
Democrats have been unable pass legislation so far that accomplishes those goals with their narrow control of Congress, and some lawmakers fret that the party is losing its chance to pass ambitious policies before campaign season dominates Capitol Hill.
Ms. Yellen said high oil prices -- which in turn fuel high prices at the pump -- were largely out of the control of U.S. policy makers in the short term as Republicans pressed her on further incentivizing fossil fuels in the U.S. Average gas prices in the U.S. hit $4.91 a gallon on Tuesday, according to AAA, a record and nearly $2 a gallon higher than last year.
"Given the global nature of these markets, it's virtually impossible for us to insulate ourselves from shocks like the ones that are occurring in Russia that move global oil prices," she said. "And look, over the medium term, the critical thing is that we become more dependent on the wind and sun that are not subject to geopolitical influences."
Republicans have blamed Democrats for inflation, arguing that the Covid-19 rescue package spearheaded by the Biden administration in early 2021 overheated the economy.
"I see no strategy out of the administration to do anything to deal with rising gas prices. And I think there's no question that the $2 trillion bill last year overheated the economy and it's why we have the mess we have today," said Sen. John Thune (R., S.D.), one of the top Senate Republicans.
Ms. Yellen defended the legislation, called the American Rescue Plan, or ARP, saying that it propelled the economy's recovery from the recession induced by Covid-19 in 2020.
"We're seeing high inflation in almost all developed countries around the world. And they have very different fiscal policies. So it can't be the case that the bulk of the inflation that we're experiencing reflects the impact of the ARP," she said.
Concerns about inflation and slow growth extend well beyond the U.S. The World Bank expects output will expand at a reduced pace globally over 2023 and 2024 as the war disrupts investment and trade while governments withdraw fiscal and monetary support.
Supply disruptions fueling inflation have been preceded by a protracted period of highly accommodative monetary policy, creating weaker prospects for economic growth, like in the 1970s, the bank said.
Still, the bank said the current situation differs from the stagflation of the 1970s because the dollar is strong, commodity price increases are smaller, and the balance sheets of major financial institutions are generally strong.
"Unlike the 1970s, central banks in advanced economies and many developing economies now have clear mandates for price stability, and, over the past three decades, they have established a credible track record of achieving their inflation targets," the bank's report said.