Rising inflation is no threat to the U.S. economy – or is it? – MarketWatch

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Are powerbrokers in Washington planting the seeds for an economy-wrecking bout of inflation later this year or next? Suddenly that’s what some are suggesting.

Talk of rising prices seems odd in the middle of a pandemic. Millions of Americans are still out of work, many businesses are struggling and demand for goods and services has not returned to pre-crisis levels.

Read: U.S. gains just 49,000 jobs in January as labor market remains under acute stress

And: Why the unemployment rate fell even though job creation was virtually nil

It’s hard to generate inflationary pressures in a slack economy. The damage the coronavirus pandemic has done drove the rate of inflation last year to almost zero, and even now, it’s rising at a mild 1.4% annual pace, according to the consumer price index.

The latest CPI report due to be released this coming Wednesday is likely to show another increase in January, perhaps nudging the yearly rate of inflation up to still-low 1.5% or so.

See: MarketWatch Economic Calendar

What worries some investors and big thinkers, however, is what happens once the economy recovers and demand returns to normal.

The government has already pumped trillions of dollars of federal aid into the economy and the Biden administration is primed to spend nearly $2 trillion more. There’s going to be a lot of money sloshing around in the economy after the vaccines do their work and things return to normal.

Lawrence Summers, a former Treasury Secretary and economic adviser to President Barack Obama, sounded an alarm in a widely read article in the Washington Post.

The Biden stimulus, he said, could eventually “set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability.”

Some Wall Street DJIA, +0.30% economists and investors also think it’s a growing possibility. The yield on the 10-year Treasury note, for example, has more than doubled since the fall to 1.17%.

But is it really likely? Most on Wall Street and in Washington have their doubts.

Inflation is all but certain to rise, the thinking goes, and return to precrisis levels of 2% to 2.5% in the near future. And some parts of the economy that recover more rapidly could experience even higher prices owing to temporary shortages of materials or skilled labor.

Yet inflation more broadly is unlikely to spiral out of control.

“As the recovery gains momentum, it will be important to distinguish such short-lived, sector-specific phenomena from more widespread and lasting” inflation, said Chicago Federal Reserve President Charles Evans.

Senior White House economic adviser Jared Bernstein was more blunt on Friday. He said Summers was “flat-out wrong,” pointing to the low rate of inflation over the past decade. Prices have risen less than 2% a year on average since the end of the Great Recession in 2009.

The Federal Reserve isn’t much worried, either.

Chairman Jerome Powell has made it quite clear he’s willing to let inflation climb to 2.5% or even higher until the economy has made a full recovery.

How it all plays out is anyone’s guess, but the message in Washington is quite clear: Worry about inflation? Not us.

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