Powell said in a Princeton speech last week that consumers could have very lavish spending over the next few months thanks to stimulus tests and an improved economy towards wider access to vaccines. As a result, some prices may rise.
But the Fed chairman has argued that it is not necessarily inflationary for the long term. Price increases can be – to use a favorite Fed buzzword – from time to time.
In other words, this is not the time to wrestle with inflation.
“Inflation is always a source of concern, and it’s an easy concept to grasp,” said Mimi Song, chief economist at CrossBorder Solutions. “Lower inventory can lead to higher prices in the short term and more stimulus can lead to higher disposable income.”
But Song argues that the global pandemic and recession are likely to hold prices. The priority should be the economic recovery, not the fear of inflation in a few years.
Inflation may roar again
However, some are concerned that Powell and Yellen are too dismissive. The economy may not be able to stay in a scenario where inflationary pressures simmer without boiling over.
“There’s this tug of war around inflation,” said Todd Lowenstein, chief executive of Private Bank at Union Bank. “Inflation may be short-lived, but we need to keep an eye on the bond market because of large federal spending.”
Lowenstein said stimulus spending, while necessary, could lead to further declines in the value of the dollar, which would fuel the flames of inflation. But the Fed is unable to raise rates to curb inflation while the economy is still so fragile. Inflation can become more of a constant problem.
“Can inflation be hedged? The Fed does not want to fight it now, but historically the issue is that inflation is like toothpaste in a tube. It is impossible to sit back,” Lowenstein said.
If inflationary pressures do increase, the Fed cannot ignore it indefinitely – at some point it will have to fend it off.
And that’s the key. The Fed has tried to stay out of politics and do what it deems best for the economy, no matter what steps the president and Congress decide to take.
“The Fed runs the risk of losing its independence if it does not fight inflation,” said Adam Lampe, CEO and co-founder of Mint Wealth Management.
“An unexpected rise in inflation could be a risk,” he added. “Inflation should be modest in 2021, but once it gets out of pocket, it can come back quickly.”
Keep an eye on wages and the labor market
In other words, wage growth would have been much lower if more Americans were working.
Other government data show that there are only small pockets of inflation.
According to the latest consumer price index report, food prices rose by 3.9%. The prices of appliances rose by 6.2% and the prices of used cars rose by 10%. But overall, consumer prices have risen by just 1.4% in the past year.
“If you look at the stock market and industries like housing, you can feel that the economy is back on track. But there is still enough sluggishness in the labor market to prevent any short-term inflation,” says investment strategist Craig Fehr. by Edward Jones. “I do not think inflation will be a predominant risk.”
Yet Fehr is concerned that inflation will inevitably become an important issue for policymakers to address.
“In the long run, the risks of inflation cannot be overstated. The market expects incredible levels of Fed stimulus for a long period of time,” he said. “If you ask me what usually stops me at night, it’s inflation.”