Main Inflation Pressure Hasn’t Come Yet, Experts Say

News Analysis

The recent uptick in inflation is no cause for panic, although there could be more to come, particularly if the government or the Federal Reserve overreacts, several experts told The Epoch Times.

The Consumer Price Index (CPI), a proxy for inflation, rose 4.2 percent year-over-year in April—the highest figure reported by the Bureau of Labor Statistics since the Great Recession of 2008. Fed officials expressed surprise at the uptick, but also announced that higher inflation will be tolerated for some time.

The increase actually isn’t as dramatic as it seems, the experts said. They indicated that the spike reflects the recovery from the economic downturn and government restrictions triggered by the COVID-19 pandemic. Indeed, if one compares the April CPI with the pre-pandemic figure from February 2020 and adjusts for seasonal changes, the increase adds up to about 3.1 percent.

That, however, still represents an acceleration from the previous trend of less than 2 percent growth.

Part of that increase stems from all the money the Fed printed to fund multiple economic stimulus packages and various measures to shore up financial markets, according to Norbert Michel, an expert on financial markets and monetary policy and director of the Center for Data Analysis at the conservative Heritage Foundation.

Usually, when the government borrows money, it’s backed by Treasury securities bought with existing dollars by individuals, companies, and governments. This time, however, a major share of the $5.6 trillion in COVID-related government spending was funded through securities bought by the Fed with brand new dollars. The Fed now holds over $5 trillion in U.S. debt, up from some $2.5 trillion in February 2020.

The result is that Americans and their businesses still have some money to spend and cover their bills, despite the economy severely contracting and still lagging behind its February high. If demand outpaces what the economy can currently supply, the buying pressure will bid up prices.

Some of that has likely happened already, Michel said, but “it’s clear there’s a lot left.”

“You see a very big increase in personal disposable income, even on a per capita basis. So far, a lot of that money has been saved because you have this drop-off in demand, so there is a concern as to what happens as the recovery takes off,” he said.

That hasn’t happened yet, and it would be an overreaction on the Fed’s part to try to tighten the money supply, he stated.

“It’s possible that this is a beginning of an upward trend, but we’re not going to know that for a little while yet, for at least another six months,” he added.

The problem may lie in the opposite extreme, according to Ryan Young, senior fellow at the pro-free market Competitive Enterprise Institute (CEI).

“I’m almost worried more about the government trying to hyperstimulate the economy because they want growth to get back to the previous trendline and the way politicians work is that would mean more spending, more stimulus, more infrastructure, more debt, more deficit,” he said.

“These are not sustainable strategies and supposing they do induce a boom, the trade-off for that is there’s going to be a bust later, leaving us no better off than before.”

The Biden administration’s $2 trillion infrastructure plan seems to push in that direction. It would certainly give banks something profitable to sink their excess reserves in, as the risk of such projects would be essentially carried by taxpayers, even if through an eventual bailout, as some other experts have previously said.

But such projects normally take years to take off and run the risk of merely displacing other private projects, since the skilled labor pool is limited, yet another expert has noted.

In the meantime, the Fed’s solution to the liquidity glut has been to essentially print more dollars to pay banks to hold money they would otherwise lend. That just kicks the can down the road, Michel said.

“You’re talking about the Fed having to pay literally hundreds of billions of dollars … easily $200 billion a year to large financial institutions to hold on to their reserves,” he said. “That’s not politically sustainable in an environment where inflation is taking off.”

The ideal situation would be for banks to return to financing projects organically emerging in the economy, Michel and Young agreed.

Rather than expanding or tightening, the economy needs relaxing, they said. Obstacles, such as burdensome regulations, need to be removed so that people can more easily come up with productive ideas and pitch them for financing.

“You know what you’re good at and I know what I’m good at a lot better than Congress does,” Young said. “And I think, writ large, that would be the best approach to get the economy completely back on track.”

Furthermore, the Fed should let go of its dual mandate of “full employment” and 2 percent inflation and simply focus on keeping the money supply roughly in line with the economic growth with inflation around zero or perhaps gently fluctuating both above and below zero, Michel and Young said.

The argument that people need to feel the constant whip of inflation on their backs to do something productive with their money is misplaced, Michel stated.

“People are going to always look for productive things to do, try to buy the things they need, invest in the things they need,” he said.

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Petr Svab
Author: Petr Svab

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