President Joe Biden’s proposed $1.9 trillion COVID-19 relief bill is fueling debate among economists about whether it will spark a nasty spike in inflation.
The consensus view is that the Personal Consumption Expenditures (PCE) inflation rate- which is the measure that the Federal Reserve uses in its desired target of a 2 percent “average” rate for the economy- will rise to 1.9 percent in 2021 and 2.0 percent in 2023. In December 2020, PCE stood at 1.3 percent in annualized terms, according to the St. Louis Fed. Several prominent economists have argued, however, that the wave of stimulus that Biden’s American Rescue Plan would unleash will bring with it inflationary pressures that could deliver a disruptive blow to inflation expectations.
“A lot of people believe that inflation in the U.S. is dead or, if not dead, in a state of suspended animation for the foreseeable future. They could be setting themselves up for an unpleasant surprise,” Bill Dudley, former president of the Federal Reserve Bank of New York, wrote in an op-ed in Bloomberg last December.
Dudley argued that several factors play into fears of above-expectation inflation. One is a surge in demand versus reduced supply. The idea is that the recent economic fallout wiped out many small businesses and as herd immunity to COVID-19 is achieved and activity ticks back to pre-pandemic levels, there simply won’t be enough businesses around- at least in the short term- to satisfy the surge in demand, driving prices higher. Read more…