Will Stimulus Money from the Federal Reserve Lead to Inflation? The Future of US Inflation

As of June 2021, policymakers have expressed surprise at the strength and duration of the current inflationary shock. Key indicators such as the CPI and core component have been accelerating, with year-over-year growth exceeding expectations.

Key Inflation Indicators

The Consumer Price Index (CPI) has seen a growth of more than 5% year-over-year (YoY) since May, while the core component has risen by over 4% YoY since June. The Personal Consumption Expenditures (PCE) price index has also increased by 4% since May, with the core PCE price index reaching 3.5% in June, the fastest pace since December 1991.

Impact on Core Inflation

The United States is expected to continue experiencing support for core inflation in the upcoming months, driven by rising rents. This trend highlights the need for careful monitoring of housing markets and their impact on overall inflation.

Money Supply and Inflation

It is important to note that the printing of currency or minting of coins by the government is not intended for spending or increased money supply. Instead, this process is solely for the replacement of damaged paper currency or coins. The digital nature of modern transactions means that the money supply remains stable through this practice.

So what does increase prices? Inflation can occur due to supply chain issues, loss of productive capacity, or reaching full employment. Some economists also consider private debt as a factor contributing to inflationary pressures.

Modern Monetary Theory

The consensus among economists is that current inflation, particularly in the first half of 2021, is mainly due to reopening economic activities and artificially depressed prices during the pandemic. However, fiscal and monetary policies that support the recovery are essential to ensure a smooth transition. As the economy returns to normal, monetary and fiscal policies can be tightened to gradually reduce inflation to the targeted rate of 2%.

However, this view is not without its critics. Alternative scenarios exist in which current economic policies may lead to severe inflationary problems. While many believe this is unlikely, there is also a growing belief that current policies may already be contributing to asset price inflation and possibly underlying consumer price inflation.

Conclusion

As we continue to navigate the recovery from the pandemic, understanding the drivers of inflation remains crucial for policymakers and the economy at large. By keeping a close eye on key indicators and economic signals, we can better prepare for any potential inflationary challenges and maintain price stability.