President Joe Biden‘s proposed $1.9 trillion bailout bill is sparking debate among economists that it could cause a vicious spike in Inflation.
Although Biden’s “American Rescue Plan” (American Rescue Plan) aims to promote economic recovery, but this is the third bailout since the outbreak of the Epidemic, a number of prominent economists believe that the stimulus wave released by the plan will bring inflationary pressure, fearing a devastating impact on inflationary expectations blow.
They speculate that personal consumption expenditure (PCE) inflation will rise to 1.9% in 2021 and 2.0% in 2023. This figure is the average target measure of the Fed’s ideal economy. Also according to the St. Louis Fed, the annualized rate of PCE was 1.3% in December 2020.
“Many believe that U.S. inflation is dead or, if not dead, in a state of suspended animation for the foreseeable future. They may be in for an unpleasant surprise.” Former New York Fed President Bill Dudley wrote in a Bloomberg op-ed last December.
He said there are several factors involved in the concern that inflation may rise more than expected.
One is a surge in demand versus a reduction in supply. This view is that because many small businesses closed during the recent recession, so that as consumers gradually become immune to the virus and trade activity returns to pre-pandemic levels, the market will not have enough supply to meet the surge in demand, at least in the short term, driving up prices.
The second factor is that the epidemic has disrupted the way businesses operate, with many taking employees to work from Home instead or moving their offices out of major city centers. The capital left behind, e.g., vacant office space in Manhattan, will take Time to reallocate and will be a drag on production growth, thus adding to inflationary pressures.
A third factor is that the Fed’s lack of urgency to withdraw easing and the federal government’s aggressive fiscal policy of being less concerned about the debt burden will further fuel inflation.
Dudley added to his list of concerns in a follow-up article on Feb. 10.
He said that this recovery will be faster than previous recoveries, with households and businesses having more spending power and inflation expectations themselves rising, due to people starting to spend more out of fear of future price increases.
Kathy Bostjančić, chief U.S. financial economist at Oxford Economics, predicts that “a strong pickup in economic activity in the spring should add further to this growth, lifting it to an annualized rate of 2.7% in the second quarter. Inflation should remain at or above 2 percent for two years, something that has not happened since the global financial crisis.”
She noted that given the upside risks to inflation and yields that are building up, inflation could be higher than expected, spiking to an average of 2.5% over the next few years.
She said factors affecting inflation include a stronger cyclical recovery this year; a dovish shift in the Fed’s mandate; a larger round of federal fiscal payments fueling an explosive increase in monetary aggregates; and quantitative easing.
Another prominent economist who warned about inflationary pressures was Olivier Blanchard, former chief economist at the International Monetary Fund (IMF). He said Biden’s bailout, combined with the previous relief package, would send the economy’s output level surging 14 percent higher than potential.
“It would bring the unemployment rate very close to zero. It wouldn’t be overheating, it would be starting a fire.” He argued that this would lead to inflation well above the model’s forecast of 2.5 percent.
Blanchard said of Biden’s proposal, “Too much (of a stimulus package) has both the potential (to achieve relief) but it also has its detrimental effects. I think this package is too much.”
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