Biden stimulus fuels inflation, suggests Fed analysis

Inflation is likely being temporarily boosted by the $ 1.9 trillion coronavirus relief program the Biden administration inaugurated earlier this year, a new study from the Federal Reserve Bank of San Francisco suggested on Monday. .

The analysis could fuel a heated debate in Washington over whether the administration’s policies are contributing to price spikes. Critics of the government’s spending program that was enacted in March, including former Treasury Secretary Lawrence H. Summers, said it was poorly targeted and risked overheating the economy. Supporters of the relief program said it was providing essential assistance to workers and businesses still battling the pandemic.

The new paper sits somewhere in the middle, noting that the spending has had some effect on inflation, but suggesting that it is most likely temporary. Economists have estimated this will add 0.3 percentage point to the core personal consumption expenditure inflation index in 2021 and “just over” 0.2 percentage point in 2022. Core inflation removes volatile elements like food and fuel.

While these numbers are significant, they’re not what most people would consider “overheating” – the Fed is aiming for inflation of 2% on average over time, and a few tenths of a percent here and there isn’t. have no reason to be alarmed.

But the result is only a rough estimate, an estimate the researchers provided to help inform continued political and economic debate.

The Trump and Biden administrations have both signed billions of dollars in virus relief spending. The packages included two bipartisan bills in 2020 that injected more than $ 3 trillion into the economy, including direct checks to individuals and generous unemployment benefits. Another $ 1.9 trillion – called the US bailout – was passed this year by Democrats after taking control of Congress and the White House.

“The later timeline and large size of the ARP have sparked debate over whether it is causing the economy to overheat and fuel a sustained rise in inflation,” the Fed researchers noted. of San Francisco.

Economists have attempted to answer this question by examining the unused capacity of the economy using a measure of the labor market – the ratio of vacancies to unemployment. The logic is that inflation tends to accelerate when there is very little under-activity in the labor market, as companies increase wages to attract workers and then increase prices to cover their costs of labor. increasing labor.

Government stimulus measures can increase the number of job openings in the economy as they fuel demand while limiting the number of workers available, as they provide future employees with a financial cushion, allowing them to take their time. to search for a new job.

Based on the size of the package and using historical evidence on how budget spending affects the labor market, the researchers found that the US bailout could raise the vacancy-to-unemployment ratio near its historic peak. of 1968, fueling some inflation – but that the impact on prices would be small and short-lived.

“This minor impact is attributable to the weak effect of the slack on inflation and the historically high stability of longer-term inflation expectations,” the economists wrote.

The researchers speculated that even if the job market is tight, it won’t last. And they assumed that businesses and consumers wouldn’t expect much higher prices due to the explosion in short-term inflation.

The new analysis is unlikely to be the last word on the matter. Inflation has jumped higher this year – the core measure of PCE climbed 3.6% during the year until August, and other measures of inflation are even higher. Many economists fear that rising prices will alter inflation expectations, not least because certain measures are is already rising higher.

Source link

About Mike Stevenson

Check Also

The temperamental exuberance of the markets flat like a pancake | Nasdaq

Markets closed regular trading flat on Monday, after a morning high that saw investors react …