Happy Sunday, Here’s Your Inflation Du Jour

Are the suits in Washington readying for an economy-wrecking bout of inflation in the next couple years? Well, that’s the word on the Street.

All this hearsay about price increases seems pretty peculiar in the midst of global pandy. A year into social distancing and millions of Americans are still out of work, many businesses are wearing thin and demand for goods and services has yet to return to pre-crisis levels. Make no mistake, generating inflationary pressures in a slap-dash economy is no layup. The damage the pandy has brought on pushed the 2020 rate of inflation to almost zero, and even now, it’s rising at a feeble 1.4% annual pace.

The recent CPI report due to be released on Wednesday is likely to show another jump in January, perhaps nudging the yearly rate of inflation up to still-low 1.5%. Which begs the looming existential question; what happens once the economy recovers and demand returns to normal? The Fed has already injected trillions of dollars of federal aid into the economy and Joey B (President Biden) is primed to pump in nearly $2 trillion more. 

Former Treasury Secretary and economic adviser to President Barack Obama, Lawrence Summers, sounded an alarm in a widely read article in the Washington Post. The Biden stimulus, he said, could eventually “set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability.” Uh, ya think? Economists on the Street think it’s a growing possibility, as the yield on the 10-year Treasury note, has more than doubled since the fall to 1.17%.

How likely is all this? Most on Wall Street and in Washington have their doubts. Inflation is all but certain to rise, the thinking goes, and return to pre-pandy levels of 2% to 2.5% in the near future. And some parts of the economy that recover more rapidly could experience even higher prices owing to temporary shortages of materials or skilled labor.

Yet inflation more broadly is unlikely to spiral out of control. “As the recovery gains momentum, it will be important to distinguish such short-lived, sector-specific phenomena from more widespread and lasting” inflation, said Chicago Federal Reserve President Charles Evans.

Senior White House economic adviser Jared Bernstein retorted quickly, saying Summers was “flat-out wrong,” pointing to the low rate of inflation over the past decade. Prices have risen less than 2% a year on average since the end of the Great Recession in 2009. The Federal Reserve isn’t much worried, either. Chairman Jerome Powell has made it quite clear he’s willing to let inflation climb to 2.5% or even higher until the economy has made a full recovery.

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