Great news! Your nearly worthless fiat dollar is about to be even more worthless. Imagine how bad it really is going to be if they are admitting it up front and early. So bad even the media isn’t going to be able to cover for them.
The COVID-19 pandemic has caused an unconventional recession, and we do not expect the recovery will be typical either. While the paramount policy goals are to control the virus, get to full employment, and make the necessary investments for a more resilient and inclusive recovery, economic uncertainties and risks demand careful attention going forward. One risk the Administration is monitoring closely is inflation.
Inflation—or the rate of change in prices over time—is not a simple phenomenon to measure or interpret. Inflation that is persistently too high can hurt the wellbeing of households, especially when it is not offset by comparable increases in wages, leading to reduced buying power. But inflation that is persistently too low leaves monetary policy with less scope to support the economy and can be a sign the economy is below its capacity, thus with room to expand jobs further. Indeed, one piece of important context around the current inflation risks is that inflation was generally weaker than the Federal Reserve’s target over the decade prior to the pandemic as the economy recovered from the Great Recession. Overall inflation, as defined by the Personal Consumption Expenditure (PCE) deflator, then fell further during the pandemic, though there have been important differences between products and sectors (see figures below).
Pandemics of the magnitude of COVID-19 are, thankfully, rare, but that also means few historical parallels exist to inform policymakers. The United States experienced short bursts of inflation in some prior periods of pandemics or large-scale reallocations of economic resources, such as in 1918—driven by the Spanish Flu and demobilization from World War I—as well as the demobilization from World War II after 1945 and the resurgence in defense spending due to the Korean War. But history is not a perfect guide here. The 1957 pandemic, for example, which coincided with a nine-month recession, saw inflation weaken, with no large resurgence even when the pandemic was over and the economy was growing again.
That said, in the next several months we expect measured inflation to increase somewhat, primarily due to three different temporary factors: base effects, supply chain disruptions, and pent-up demand, especially for services. We expect these three factors will likely be transitory, and that their impact should fade over time as the economy recovers from the pandemic. After that, the longer-term trajectory of inflation is in large part a function of inflationary expectations. Here, too, we see some increase, but from historically low to more normal levels. We explain our reasoning below.
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