There is a growing debate about whether the inflation that will arise over the next few months will be temporary, reflecting the sharp bounce-back from the Covid-19 recession, or persistent, reflecting both demand-pull and cost-push factors.

Several arguments point to a persistent secular increase in inflation, which has remained below most central banks’ annual 2% target for over a decade. The first holds that the US has enacted excessive fiscal stimulus for an economy that already appears to be recovering faster than expected. The additional $1.9tn (£1.4bn) of spending approved in March came on top of a $3tn package last spring and a $900bn stimulus in December, and a $2tn infrastructure bill will soon follow. The US response to the crisis is thus an order of magnitude larger than its response to the 2008 global financial crisis.

The counter-argument is that this stimulus will not trigger lasting inflation, because households will save a large fraction of it to pay down debts. Moreover, investments in infrastructure will increase not just demand but also supply, by expanding the stock of productivity-enhancing public capital. But, of course, even accounting for these dynamics, the bulge of private savings brought by the stimulus implies that there will be some inflationary release of pent-up demand.

A second, related argument is that the US Federal Reserve and other major central banks are being excessively accommodative with policies that combine monetary and credit easing. The liquidity provided by central banks has already led to asset inflation in the short run, and will drive inflationary credit growth and real spending as economic re-opening and recovery accelerate. Some will argue that when the time comes, central banks can simply mop up the excess liquidity by drawing down their balance sheets and raising policy rates from zero or negative levels. But this claim has become increasingly hard to swallow.

Centrals banks have been monetising large fiscal deficits in what amounts to “helicopter money” or an application of Modern Monetary Theory. At a time when public and private debt is growing from an already high baseline (425% of GDP in advanced economies and 356% globally), only

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