“We’ve had less than 2 percent inflation on average for the past 25 years,” Powell recently told lawmakers. “Inflation dynamics do change over time, but they do not change in one go.”
Biden has proposed a spending plan of more than $ 2 billion for the country’s infrastructure, which also includes everything from building child care facilities to promoting Medicaid funding. This is in addition to the $ 1.9 billion Covid relief package he signed last month and the $ 900 billion spending approved by Congress in December. Another spending plan will be announced this month.
While administration officials have dismissed warnings about the possibility of excessive inflation, spending has clearly been accompanied by a newfound openness to the possibility of upward pressure on prices, an attitude that even some Democrats, as former Treasury Secretary Larry fired. Somers.
“It’s very easy to make the mistake of thinking that what one has not seen for a long time will never be seen again,” Summers said in an interview. “And it’s usually better to think things are going around.”
But Powell and Finance Minister Janet Yellen argue that the risk of too much inflation is much lower than not having enough. This is because the economy has changed radically over the past 50 years.
The double-digit inflation that was last seen decades ago – during Jimmy Carter’s government – was not just the result of aggressive government spending. This stemmed from a variety of factors, including rising oil prices, a poor White House effort to curb wages and prices, and a shift in U.S. dollar policy. And then there was the demographic – young, big-spending Baby Boomers with newly purchased homes and double-income households as women entered the workforce in groups.
The structure of the world economy pushes prices, if at all, into advanced economies such as the US, with low inflation often attributable to the rapid growth of international trade, automation and the internet (sometimes called ‘the Amazon effect’).
Demography is also part of the story today: people in richer countries are having fewer babies and therefore their populations are getting proportionately older.
“Most people over a certain age just don’t need that much,” said Constance Hunter, chief economist at KPMG. ‘You have already decorated your house. You do not commute to work. ”
“If you look at countries like Japan, for example, the dominant feature of their economies in terms of demographics is that they just do not have enough demand to generate inflation,” she said.
For now, some signs of inflation are starting to appear, a phenomenon that the Fed predicts will be temporary while the economy reverts to full openness. U.S. producer prices rose in March, the largest annual rise in nearly a decade, and other inflation meters in the coming months are expected to be just as strong. It feeds Republican warnings about the dangers of large-scale government spending.
Senator Pat Toomey (R-Pa.), The rank member of the Banking Committee and a longtime critic of ultra-low interest rates, calls it ‘the latest worrying indication that inflation is starting to rise’.
“Despite the recovery of the economy, growth projections of 2021 of more than 6 percent and steady employment gains, the Federal Reserve keeps the interest rate at zero while buying nearly $ 1.5 billion worth of bonds annually,” he said in a Friday statement. statement said. ‘The Federal Reserve claims that this inflationary effect will be mild and temporary. It may be time for the central bank to consider the alternative. ”
But instead of getting too caught up in the outlook for inflation, the Fed seeks a balance between the lessons of two different periods: the Great Inflation of the 1970s, when annual inflation rates rose as high as 13.5 percent, and the long but slow recovery from the 2008 financial crisis. When the Fed released its bond-buying programs years after the last recession, lawmakers like Toomey expressed concern about inflationary pressures that never took hold.
Either way, if inflation really starts to decline, the Fed should have enough time to react.
‘It’s called the Great Inflation because it’s really like a process of 15, 16 years. It’s a long-term, gradual build-up, ‘says David Beckworth, a senior research fellow at the Mercatus Center at George Mason University.
Today, markets do not even price significantly higher inflation, and they may still expect the Fed to swing and raise rates at the first sign of trouble, despite its promise to remain steadfast until the economy gets full work.
Spending habits, wages and prices are partly related to the psychological phenomenon or people expect inflation to increase, making these types of signals the key to the early signs of even higher inflation. “I do not see ourselves in the first phase of the Great Inflation,” Beckworth said.
The first phase began in the latter half of the 1960s, when inflation increased, coupled with rapid economic growth and low unemployment. Before the move to the ‘stagflation’ of the 1970s – economic stagnation plus inflation – Arthur Burns, the then Fed chairman, was put under pressure in the run-up to the 1972 presidential election to keep interest rates low.
“It was a great lesson in the ’60s and during the’ 70s: policymakers, especially at the Fed, somehow abdicated their responsibility for controlling inflation,” said Michael Feroli, chief economist at JPMorgan Chase.
The growing consensus, also in the Fed itself, is that it has over-corrected in the decades since the Great Inflation by being too aggressive in trying to fend off higher price levels. After the financial crisis of 2008, the central bank raised rates before economic growth reached all corners of the labor market, although there was no sign that inflation would increase. This is now considered by many economists to be a policy error.
A new article by the Groundwork Collaborative, a progressive activist group, criticizes the estimate of ‘full-time work’ that is generally accepted that certain racial groups will have excessively high unemployment rates. They also argue that insufficient federal spending and the Fed’s strict monetary policy have done more harm than just workers’ wages.
“If labor is never scarce and wages stagnate, there is less pressure to invest in labor-saving technologies that increase productivity growth, even when interest rates are relatively low,” according to the newspaper Adam Hersh and Mark Paul.
Aware of these negative ripple effects, the Fed has launched a new framework under which it would strive for slightly more inflation to lower the unemployment rate than it would otherwise be able to do.
Now Congress and the Fed are working together to accelerate the economy in hopes of accelerating growth and increasing central bank inflation.
Skanda Amarnath, director of research and analysis at Employ America, noted that spending among Biden is expected to spread over several years and that it could increase the overall productivity of the economy – growing supply along with demand. “It’s going to take something that takes a lot of time to fully realize,” he said. “It doesn’t have to appear as inflation, and if it does, I think it’s going to be pretty modest.”
But the Fed has not completely forgotten the lessons of 50 years ago. Powell promised that the central bank would not hesitate to stifle levels of inflation, rather than repeat its mistakes in the past.
If it looks like inflation is going to rise too fast, ‘we will of course react’, he said on Thursday during an event of the International Monetary Fund. “That would be our job.”