What is your near-term view for our economy, given the current economic environment, the massive increase in the money supply, and the possibility for inflation?
A strong expansionary monetary policy is helping the US economy. According to the most recent data, the official M2 money supply has increased by 32% since February 2020, just before COVID-19 was proclaimed a global pandemic (May 25, 2021). From February 2020 to June 17, 2021, the assets on the Federal Reserve balance sheet accumulated over this period, supplying liquidity to the US economy and known as quantitative easing (QE), nearly doubled, going from $4.1 trillion to $8.1 trillion.
On the budgetary front, the US economy has spent about $5 trillion on COVID-19 stimulus initiatives (when you add the $3 trillion spent under President Trump to the $2 trillion spent under President Biden).
Given these variables, as well as the ongoing reopening of the US economy, the US economy is expected to increase by around 7% in 2021 and 3.5 percent in 2022.
We’ve heard that the present rate of inflation is only temporary. What makes it transitory, and do you believe this evaluation is accurate?
When recent events are taken into account, the increase in inflation that we have seen in 2021 as the CPI has risen to a 5% year-over-year pace should not come as a surprise.
These include a rapid economic recovery, supply-side disruptions, more job openings than workers willing to work due to child care issues, lingering concerns about returning to work due to the pandemic, and generous unemployment insurance benefits that made it more profitable to collect these government payments while delaying a return to work.
As a result, I am convinced that some present inflationary pressures are structural and others are transient. Many of the higher salary are provided in the form of one-time bonuses. Because the enhanced payments are one-time only, they will be temporary.
Many of the pricing pressures created by supply-side bottlenecks, on the other hand, are likely to subside. Lumber prices have already dropped by more than half since their high. The enhanced unemployment benefits that made it more economical to delay returning to work have been withdrawn in half of the US states, while the other half will see the program stop during the week of September 6, 2021.
To put it another way, certain price pressures are permanent, while others are only temporary. Still, I anticipate that the core personal consumption expenditures price index will climb faster than the Federal Reserve’s projected 3% annual increase in 2021, but will fall below 3% in 2022, bringing inflation closer to the Federal Reserve’s target of 2%.
It’s worth noting that the Federal Reserve has been targeting this inflation index at 2% since January 2012, but it’s been falling short of that target for the most part since then. As a result, they have some leeway to allow inflation to rise slightly above their present price target while still meeting such targets over longer periods.
The possibility of stagflation cannot be overlooked, given rising inflationary pressures and the fact that the US economy would face a $1.5 to $1.8 trillion fiscal drag in 2022 once the current rate of stimulus ends. What if the present infrastructure bill, worth $1 trillion to $1.5 trillion, is passed? Only a small portion of the funds will be spent each year because they will be distributed over the following five to eight years. As a result of the high budgetary drag projected for 2022, much of the current inflation pressure could become permanent rather than transient. If this scenario plays out, the probability of stagflation increases significantly. Although it is not my base case, it still has a nonzero chance.
Can you explain about the impact of central banks on long-term interest rates?
This is my favorite question because my PhD dissertation was about the yield curve. Regulating short-term rates has always been more easier for central banks than controlling long-term rates. This is because long-term rates are set by inflation expectations and a term premium, which reflects how much investors must be compensated for lending money out over a longer period of time. Finally, we must include a risk premium or uncertainty in this rate.
Nonetheless, other central banks, such as the Bank of Japan, have pursued yield curve management tactics that merely buy and sell a specific government securities maturity (through open market operations) to keep the rate within the given target range. Even while it is more difficult than just controlling short-term rates, it is possible.
Are there any historical examples that we can learn from that are comparable to today’s environment?
Many investors compare the inflationary time of the 1970s to the current moment to see whether there are any strong parallels that allow us to predict that history will repeat itself. However, there are few analogies between the two times. Food prices rose by more than 16 percent year over year in the 1970s, but they are now rising at a 2 percent annual rate. Corn and wheat prices are currently dropping rather than climbing from recent readings.
On the energy front, we saw the price of a barrel of oil jump from under $4 to a high of $40. Oil prices are currently up 56 percent year over year, but are still lower than they were in October 2018. Oil prices are unlikely to climb by a factor of ten, as they did between 1970 and 1980.
Finally, consumer polls, such as the University of Michigan’s Index of Consumer Sentiment, predict that inflation will grow by 3.4 percent in 2022, well below the over 15% peak seen in 1980. In contrast, credit markets, as measured by breakeven inflation rates, forecast inflation of just 2.25 percent over the next ten years, indicating that even financial markets are not anticipating the increase in inflation pressures seen between 1970 and 1980.
The lesson here is that, while not all current inflation pressures are transitory, we are led to expect that, even when nontransitory inflation pressures are included in, the total inflation rate in 2022 will not come close to the worrisome peak inflation rate seen between 1970 and 1980.
Will there be inflation in the United States in 2021?
According to Labor Department data released Wednesday, the consumer price index increased by 7% in 2021, the highest 12-month gain since June 1982. The closely watched inflation indicator increased by 0.5 percent in November, beating expectations.
Is inflation in the United States rising?
Everywhere in the developed world, prices are rising. Consumer price inflation in the United States, however, is higher than in any other industrialized country, at 7% each year. In January, inflation in Europe reached 5.1 percent, the highest level since the euro was established over two decades ago.
RELATED: Inflation: Gas prices will get even higher
Inflation is defined as a rise in the price of goods and services in an economy over time. When there is too much money chasing too few products, inflation occurs. After the dot-com bubble burst in the early 2000s, the Federal Reserve kept interest rates low to try to boost the economy. More people borrowed money and spent it on products and services as a result of this. Prices will rise when there is a greater demand for goods and services than what is available, as businesses try to earn a profit. Increases in the cost of manufacturing, such as rising fuel prices or labor, can also produce inflation.
There are various reasons why inflation may occur in 2022. The first reason is that since Russia’s invasion of Ukraine, oil prices have risen dramatically. As a result, petrol and other transportation costs have increased. Furthermore, in order to stimulate the economy, the Fed has kept interest rates low. As a result, more people are borrowing and spending money, contributing to inflation. Finally, wages have been increasing in recent years, putting upward pressure on pricing.
What triggered the 2021 inflation?
As fractured supply chains combined with increased consumer demand for secondhand vehicles and construction materials, 2021 saw the fastest annual price rise since the early 1980s.
What is the current source of inflation?
They claim supply chain challenges, growing demand, production costs, and large swathes of relief funding all have a part, although politicians tends to blame the supply chain or the $1.9 trillion American Rescue Plan Act of 2021 as the main reasons.
A more apolitical perspective would say that everyone has a role to play in reducing the amount of distance a dollar can travel.
“There’s a convergence of elements it’s both,” said David Wessel, head of the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy. “There are several factors that have driven up demand and prevented supply from responding appropriately, resulting in inflation.”
Is inflation likely to worsen?
If inflation stays at current levels, it will be determined by the path of the epidemic in the United States and overseas, the amount of further economic support (if any) provided by the government and the Federal Reserve, and how people evaluate future inflation prospects.
The cost and availability of inputs the stuff that businesses need to make their products and services is a major factor.
The lack of semiconductor chips, an important ingredient, has pushed up prices in the auto industry, much as rising lumber prices have pushed up construction expenses. Oil, another important input, has also been growing in price. However, for these inputs to have a long-term impact on inflation, prices would have to continue rising at the current rate.
As an economist who has spent decades analyzing macroeconomic events, I believe that this is unlikely to occur. For starters, oil prices have leveled out. For instance, while transportation costs are rising, they are not increasing as quickly as they have in the past.
As a result, inflation is expected to moderate in 2022, albeit it will remain higher than it was prior to the pandemic. The Wall Street Journal polled economists in early January, and they predicted that inflation will be around 3% in the coming year.
However, supply interruptions will continue to buffet the US (and the global economy) as long as surprises occur, such as China shutting down substantial sectors of its economy in pursuit of its COVID zero-tolerance policy or armed conflicts affecting oil supply.
We can’t blame any single institution or political party for inflation because there are so many contributing factors. Individuals and businesses were able to continue buying products and services as a result of the $4 trillion federal government spending during the Trump presidency, which helped to keep prices stable. At the same time, the Federal Reserve’s commitment to low interest rates and emergency financing protected the economy from collapsing, which would have resulted in even more precipitous price drops.
The $1.9 trillion American Rescue Plan passed under Biden’s presidency adds to price pressures, although not nearly as much as energy price hikes, specific shortages, and labor supply decreases. The latter two have more to do with the pandemic than with specific measures.
Some claim that the government’s generous and increased unemployment insurance benefits restricted labor supply, causing businesses to bid up salaries and pass them on to consumers. However, there is no proof that this was the case, and in any case, those advantages have now expired and can no longer be blamed for ongoing inflation.
It’s also worth remembering that inflation is likely a necessary side effect of economic aid, which has helped keep Americans out of destitution and businesses afloat during a period of unprecedented hardship.
Inflation would have been lower if the economic recovery packages had not offered financial assistance to both workers and businesses, and if the Federal Reserve had not lowered interest rates and purchased US government debt. However, those decreased rates would have come at the expense of a slew of bankruptcies, increased unemployment, and severe economic suffering for families.
What’s the source of today’s inflation?
Inflation isn’t going away anytime soon. In fact, prices are rising faster than they have been since the early 1980s.
According to the most current Consumer Price Index (CPI) report, prices increased 7.9% in February compared to the previous year. Since January 1982, this is the largest annualized increase in CPI inflation.
Even when volatile food and energy costs were excluded (so-called core CPI), the picture remained bleak. In February, the core CPI increased by 0.5 percent, bringing the 12-month increase to 6.4 percent, the most since August 1982.
One of the Federal Reserve’s primary responsibilities is to keep inflation under control. The CPI inflation report from February serves as yet another reminder that the Fed has more than enough grounds to begin raising interest rates and tightening monetary policy.
“I believe the Fed will raise rates three to four times this year,” said Larry Adam, Raymond James’ chief investment officer. “By the end of the year, inflation might be on a definite downward path, negating the necessity for the five-to-seven hikes that have been discussed.”
Following the reopening of the economy in 2021, supply chain problems and pent-up consumer demand for goods have drove up inflation. If these problems are resolved, the Fed may not have as much work to do in terms of inflation as some worry.
What will be the CPI in 2022?
From 1950 to 2022, the Consumer Price Index CPI in the United States averaged 118.40 points, with a top of 284.18 points in February 2022 and a low of 23.51 points in January 1950.