As an economy expands and grows stronger, incomes rise and the demands for goods and services rises with it. Over time, this healthy economic growth leads to inflation. In current U.S. Federal Reserve Fiscal policy, the targeted inflation rate has been 2%. But the Covid-19 pandemic created major contractions in the US economy and soon it began to deflate. Much of this deflation was by force, as countless businesses and many industries were forced to shut down or restrict their services. But one year, a few vaccines, and trillions of dollars later, the US economy is poised to make a comeback. And so is inflation.
As the scope and influence of Covid-19 begins to release its grip over business, and public life in general, inflation will be an inevitable consequence of stimulating a currently deflated economy. As noted by CNBC, “The primary driver is an economic reopening fueled by more Americans getting vaccinated, which will cause upward price pressure in industries that were held back during the coronavirus pandemic.” Once Americans are able to shed the restrictions imposed on them and services like entertainment, dining, and travel begin to reignite, economic activity is likely to be explosive.
However, once Americans begin living their lives with a relative degree of pre-pandemic normality, the sharp increase in demand will be confronted by the negative supply side impacts of the virus. SeekingAlpha reports that “We’re already seeing strain in the supply chain. Manufacturing subindices from the Institute for Supply Management, which measure things like order backlogs and supplier delivery times, are high and rising, which tends to foreshadow higher inflation.” With demand likely to be intense in 2021, it is inevitable that prices will see a sharp increase as supply struggles to be met, at least for part of the year.
According to recent reporting by Bloomberg, New York Fed President Bill Dudley, agreed that aggregate demand for goods and services expected this year will likely lead to increased inflation, which may be a necessary counterweight. “…sharp price increases might even be needed to balance demand with the available supply, which the pandemic has undoubtedly diminished.” And Dudley is hardly alone in his assessment.
In January of this year, Fannie Mae released its annual outlook on the economy and housing, concluding that the country runs a high risk of unwanted inflation by the end of the year, reports The Motley Fool. In their assessment, the fiscal policies of the last year have resulted in far higher rates of saving. “As a result of these policies, household checking accounts grew by $700 billion last year between the first quarter and third quarter, and the personal saving rate grew by 13% in December, twice the level it was before the pandemic.” In theory, this build-up of excess cash in American bank accounts will be unleashed on an economy unable to meet production due to pandemic related impacts on supply chains.
There are three segments that Business Insider says may be impacted most by the coming inflation in 2021: Housing, Health Care, and Energy-all of which have been trending higher even amidst the pandemic. “Mortgage lenders will hike up rates for borrowers to compensate for higher yields as they trade mortgage-backed securities on the bond market.” While mortgage rates have been historically low, the publication points out that rates at the end of February were the highest since August of last year. In addition, “The healthcare sector has seen a 14.7% increase in CPI, per Jefferies, signaling that Americans will have to pay even more for health care than they already are.” And the price of one barrel of oil has gone up nearly 50% since its summer lows.
Ultimately, one of the biggest factors contributing to the fears of inflation coming in 2021 is that the United States government continues to print piles of money that it doesn’t have. In the Trump Administration budgets leading up to the pandemic, the United States was averaging around one trillion-dollar deficits. In the last year alone, the government has added nearly three trillion dollars in additional debt under the moniker of Covid-19 relief funding. Such an increase in our national debt and money supply is unprecedented. And to writer Peter Murphy, there will be consequences to the rampant money printing occurring in Washington. “The more dollars get printed this way, the more likely will be major price inflation, which would be devastating to the average American taxpayer and consumer.” In closing, when considering the potential inflation headed our way, Murphy’s observations are prescient: “The laws of economics cannot be disregarded indefinitely by politicians.”
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