Topline

Amid heated debate in Washington over whether President Biden’s ambitious spending plans will push inflation to dangerous levels and overheat the economy, White House economists on Monday said they believe inflation will rise in the short term but fall back to manageable levels over time. 

Key Facts

Jared Bernstein, a member of the Council of Economic Advisers, and Ernie Tedeschi, a senior economist on the council, laid out three factors that could cause inflation to rise over the next several months.

First, unusually low prices during the peak of the pandemic last spring will distort year-over-year growth rates.

Second, ongoing supply chain disruptions caused by the pandemic mean some materials are more expensive than usual, which could cause manufacturers to temporarily raise prices to make up for the added cost. 

Last, pent-up demand caused by months of lockdowns and restrictions may prompt some businesses—especially those in the service sector—to raise prices to take advantage of the consumer boom.

Bernstein and Tedeschi emphasized that they expect all three of those pressures to be short-term and temporary, and that a short-term uptick in inflation is “consistent” with the historical performance of the U.S. economy after other periods of upheaval. 

Crucial Quote

“We think the likeliest outlook over the next several months is for inflation to rise modestly due to the three temporary factors we discuss above, and to fade back to a lower pace thereafter as actual inflation begins to run more in line with longer-run expectations,” the economists wrote.

Big Number

37%. That’s the portion of investment managers surveyed by Bank of America last month who named inflation—not Covid-19—as the biggest risk to markets. In a Sunday interview with CBS’s 60 Minutes, Federal Reserve chair Jerome Powell took the opposite view: “the principal risk to our economy right now really is that the disease would spread more quickly,” he said. 

Key Background

Biden administration officials including Powell and Treasury Secretary Janet Yellen have repeatedly emphasized that while they expect a short-term spike in inflation, they are not concerned in the long term. Last summer, the Fed made a major change to the way it manages its 2% inflation target: instead of pulling back on accommodative policy before inflation reaches that threshold, the central bank will now allow inflation to average 2% over time. That means it will tolerate inflation that runs hotter than 2% in order to avoid withdrawing necessary support too soon during economic slowdowns. Powell has also emphasized that with interest rates at rock bottom levels, the central bank has the tools it needs to combat runaway inflation should it become an issue. 

Chief Critic

“The Federal Reserve maintains that this bout of inflation will be mild and temporary. It may be time for the central bank to consider the alternative,” Senate Banking Committee ranking member Pat Toomey (R-Pa.) said in a statement Friday after data from the Labor Department showed U.S. producer prices jumped 1% in March—their largest increase in almost a decade.

Further Reading

Inflation—Not Covid-19—Is Now The Biggest Risk To Markets, Bank Of America Survey Shows (Forbes)

Fed Chair Powell Warns That Cyber Attacks And Covid-19 Spreading Again Are The Biggest Risks To The Economy (Forbes)

JPMorgan’s Jamie Dimon Predicts An Economic Boom That Could ‘Easily’ Last Until 2023 (Forbes)

Biden’s Infrastructure Plan May Slow Economy Down, Moody’s Says—But Not For Long (Forbes)