Experts Unsure Whether Stimulus Causing Inflation
WASHINGTON — If it seems like prices are going up for things like gas, groceries, vehicles, and houses, they are. The Consumer Price Index has risen by an average of 0.7% per month over the last three months, is now 5% higher than a year ago, and is already up 2.7% in just the first five months of 2021.
But while some think rising prices — or inflation — are transitory and simply the result of the economy correcting itself post-pandemic, other analysts are more worried about persistent inflation, the likes of which the United States hasn’t seen since the 1970s.
“Most of us admit that this initial inflation surge is transitory… we’re not looking at a hyper-inflation story just yet,” said Tim Duy of SGH Macro Advisors and the University of Oregon at a discussion convened by the Committee for a Responsible Federal Budget. “But we should be humble about [inflation] in the near future.”
“I’m not concerned that a 70’s style inflation is around the corner… but we could have inflation in a range going forward that is a little bit complicated for the Fed.”
According to Duy, many of the longer-term inflation expectation indices showed measures that have been rising since the pandemic began, so the United States may have been on an inflationary projection anyway. But other analysts believe that the government response to COVID exacerbated inflationary pressures.
“Six trillion dollars in support for the economy — covering everything — is an awful lot of money to dump in the economy… and there are consequences to that. One is inflation,” Marc Goldwein of the Committee for a Responsible Federal Budget said.
“We’re headed to an economy performing at above-trend, pre-pandemic levels, thanks, in part, to fiscal relief. But did we go too far?”
Jason Furman of Harvard University agreed that the U.S. government’s substantial fiscal response was the reason U.S. GDP is expected to be above that forecasted prior to the pandemic, “the only G7 country where that is true,” but he said it is also only the U.S. that is seeing “an incredibly rapid pace of inflation.”
Forecasters have been dismissive that the probability of inflation could rise far above 3%. The Federal Reserve has amended previous forecasts, now projecting inflation will climb to about 3.4%. The central bank has indicated that it prefers an average 2% inflation but has not defined the window between which it would take this average.
“I’d be perfectly happy with 3% as long as the Fed can lock it in,” said Furman, adding that demand is likely to continue to exceed supply for some time and that the government’s response has led to individual factors that make the financial future that much more unpredictable, including “excess personal savings, some fiscal stimulus still coming, [and] financial conditions [that] are loose.”
“The ordinary American may not care about inflation,” Duy said, reminding that students have no experience with the high inflation environments the U.S. has experienced in the past,”and many just don’t remember its effects. But the ordinary American will care to what extent inflation eats into wage gains, for example.
“Every signal that we have in the economy… is pointing to a softening in inflation between 2021 and 2022, and if that’s the case, we can feel confident that economic mechanisms are working,” said Wendy Edelberg of the Brookings Institution’s Hamilton Project. “If not, that’s a far more complicated world and a far more worrying world.”
But just as the pandemic threw economies up in the air, the fiscal future is unpredictable. The only consensus is that there is no way yet to know whether inflation is merely transitory or persistent.
“At the moment, the inflation expectation scenario isn’t unduly terrifying,” Ian Shepherdson of Pantheon Microeconomics said, but added, “anyone banging the table claiming that they know what’s going to happen is kidding themselves.”
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