For inflation to be a near-term threat, five things would have to happen this year:
- Vaccines and other measures bring the pandemic under control this summer in the US and other developed countries.
- Consumers use relief dollars, savings, and/or borrowing to quickly increase their spending on discretionary goods and services.
- This spending is large enough to exceed post-pandemic production capacity and spark price increases.
- The Federal Reserve lets the economy “run hot” and maintains its low interest rates and asset purchases.
- Congress and the Biden administration leave the fiscal spigots open by not raising taxes or cutting spending.
All these are possible. Are they likely?
One certainly is: I think the Fed will stay loose in almost any possible scenario, just as it did long after the last recession ended.
The Federal Open Market Committee members don’t have the stomachs for another taper tantrum. (Remember in 2013 when Ben Bernanke’s mild hint that asset purchases might not continue forever infuriated a liquidity-addicted Wall Street?) So they probably want to avoid the explosive reaction that aggressive tightening would produce.
But the others are much harder to predict.
The more we learn about the B117 and other variants, the more likely another viral surge looks. It may be more manageable if we’ve vaccinated enough older and vulnerable people, and if the vaccines are also effective against variants.
It is a true race. The US is now administering over 1.5 million vaccinations a day, and the number is growing. By the time many of you read this, they should have reached over 15% of the population, and a much higher percentage of the vulnerable population.
If we faced only the original virus, we could actually begin to relax. Those cases are clearly dropping.
But US government officials, looking at the same B117 growth rate that I am, and also the South African and Brazilian variants, are reportedly considering internal US travel restrictions to slow potential outbreaks.
I applaud them for not being complacent. But if any travel restrictions are enacted, you can stick a fork in inflation. Any worries about it will be over.
Even without further restrictions, it’s hard to project how much consumer spending patterns will change, and how quickly. When the pandemic fear finally fades, people can only take so many vacations and get so many haircuts.
This “pent-up demand” we hear about doesn’t apply to services the same way it does to goods, and services have suffered the most.
People are being cautious. For many of them, prior relief checks helped pay down debt and pad savings. Another virus wave will make everyone even slower to spend. That wouldn’t be inflationary.
It also matters, for both goods and services, how post-pandemic demand matches post-pandemic supply. Businesses may or may not be ready to deliver exactly what consumers want to buy. Further, when 150,000+ small businesses have closed, there may be a lot of missing supply.
We should expect shortages of some things and surpluses of others. How all that will sort out, and its effect on prices and therefore inflation, is still unclear.
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Related: The Case for Inflation