Brief # 121 – Economic Policy
Should We Be Concerned About Inflation?
By Rosalind Gottfried
June 20, 2021
Inflation occurs when the value of money decreases, largely due to increases in prices which are not matched by rises in income. With the vaccine rollout, people are emerging from their pandemic cocoons and demands for goods and services are surging. High demand, coupled with reduced supplies, is causing prices to rise. Anyone trying to rent a car; buy appliances or cars; buy airline tickets or get building materials can attest to the rise in prices and the competition to get goods in a timely fashion. As a result, the May consumer price index showed an increase of .6% which would amount to a 5% annual increase—way higher than the “tolerated” 2% level.
The government has spent $5.5 trillion in pandemic relief and Biden has proposed a 6 trillion dollar budget for the year. Big spending and low interest rates, which have remained near zero level, often lead to inflation. These trends can be seen in the high inflation of the periods during the world wars and in the 1970s. In the past several decades inflation has been low, especially since the 2008 recession. Economists attribute the decades’ trend to the huge influx of global goods produced by workers especially in China and the former countries of the Soviet Union. Now we are entering an era of fewer workers and reduced production due to a larger aging population and a lower fertility rate. If production slows and good remain scarce, than prices will continue to rise.
Currently, it is difficult to assess the severity of this trend because of the artificial lowering of goods and services during the pandemic and the subsequent pent up demand. It is debated how this trend will play out in the next year or so. The Biden administration and the Federal Reserve are banking on the temporary nature of the price increases. They recognize that people who have saved money during the pandemic are not put off by the higher prices and they hope demand will level out. Treasury Secretary Janet Yellin has adopted a wait and see attitude regarding hoisting the interest rate and more economists agree with her than don’t though there is a growing minority who feel that if she waits for things to get worse it will be too late to effectively stall inflation.
The Fed is addressing stabilizing the economy by keeping interest rates low and buying 120 billion in long term bonds monthly to keep mortgage rates low. The policy currently suggests that the bond purchases will be reduced before interest rates will be increased. If sustained inflation hits the 3% mark, the Fed will likely step in.
Currently Secretary Yellin is not concerned about inflation and is not ready to move on an increase in interest rates. She asserts that the price climbs will cease and the economy readjust. About one quarter of surveyed economists disagree with that assessment, predicting serious inflation. They see Biden’s budgets and programs, such as free childcare and community college, as amounting to irresponsible government spending matched with stimulus to grow the economy which they hold will lead to a more persistent inflation. It is hard to say what will occur as the country moves into a post-vaccine return towards normality. At the moment more economists appear optimistic than not though there is some evidence that the rate of inflation fearful experts is growing faster than their more optimistic colleagues.