Why Inflation Could Run Hot In The Coming Years.

Inflation has remained consistently low. However, for some time now some popular economists are predicting inflation to run hot. 

One of these economists is Mr. Jason Furman, an economic advisor in the Obama administration, who has predicted inflation to rise to 3.5% or higher in late 2021 or 2022. 

A Harvard economist called Greg Mankiw also predicted a possible “overheating” of the economy if consumer prices were to rise by more than 3 percent a year, while bond market investors push for a shift towards a 3 percent or higher annual inflation for the next 5 years. 

A chief economist at Grant Thornton, Diane Swonk, has predicted a whopping 5 percent possible inflation rate, describing it as “hot”. 

A few economists like the Treasury secretary to President Clinton and a top advisor to President Obama even predicted a possible recession that mimics those before 1990 – when, like now, the Fed literally “killed” expansions to control inflation.

However, not all economists share the same views. One of such economists is Julia Coronado, president of MacroPolicy Perspectives, who sees nothing wrong with the current mix of monetary and fiscal policy though others are spelling doom ahead. To Julia, she is rather optimistic about the macro outlook of the economy. 

Austan Goolsbee, an economist at the University of Chicago seems to disregard any warnings of overheating, so long as the inflation rates are not accelerating as they did in the 1970s.

Nevertheless, amid all this mixed view of whether a potential overheating is around the corner or not, one may be quick to ask what exactly may have triggered these predictions – most of which being in support of an actual overheating of the economy? In other words, why could inflation run hot in the coming years?

Blame It On The US Fed:

Well, a majority of the predictions are because of the $1.9 trillion pandemic relief package and other spending measures by the Biden administration. As if that is not all, the government sought $3 trillion more. The latter, it says, would be used to build infrastructure, control carbon emissions and reduce inequality.

This is what we know so far about the Infrastructure Bill, which gained bipartisan support in Senate with 69 in favour and 30 against would be spent as follows:

  • $1 trillion packages are already passed by Senate 
  • Main areas of spending: transportation, utilities, and pollution cleanup.
  • On transportation: Roads, bridges, and other transportation projects – $110 billion; airports – $25 billion; and railways – $66 billion.
  • On utilities: high-speed internet to connect rural communities – $65 billion and Western water infrastructure – $8 billion
  • On pollution cleanup: cleaning up abandoned wells and mines, and Superfi=und sites  – $21 billion.

Economists who believe there could be inflation (and even a possibility of a depression) attribute their concerns to the amount of money going to be pumped into the economy. This is a major reason there is a fear of possible inflation. Whenever so much money is pumped into the economy, it only devalues the dollar. 

Long-Term Effect Of The Pandemic:

Now, many workers are yet to recover fully from the effects of the pandemic – from unemployment to delay in returning to the workplace. On top of that, most of these people may probably have to wait to enjoy their checks for the pandemic relief package, too. In the end, this could affect the production of goods and services. If demand should go up for products and services of low supply, prices of those products or services are likely to go up. To make up for their losses, businesses would increase their wages while bond investors push for higher bond market interest rates. In all this chaos, one thing is assured to happen – an increase in inflation rates.

The Bottom Line on inflation:

By this, we do not conclude that inflations or overheating may be around the corner. Nevertheless, there are a lot of signs of what may be about to happen soon. Nevertheless, should there be a rise in inflation to a hot value, you become prepared in advance, while missing nothing should things get normal as usual.

Some links that may help you

Our article Beating inflation with investments is designed to show you methods people use to get ahead of inflation

You can learn more about the Bank of England Base rate on their own website here