Inflation: Demand Will Exceed Supply for the Rest of This Year

#Fed #inflation

“Demand-pull inflation is a specific phenomenon, and it typically refers to an effect not just impacting individual goods and services or markets, but entire economies”— Paul Ebeling

This concept was originally developed as part of Keynesian economics, a set of economic theories developed by John Maynard Keynes during the early half of the 20th Century. Much of his economic ideas set out to understand the Great Depression and were built around the goal of encouraging peak economic performance by influencing consumer demand for goods and services. 

We have seen sharply rising prices over the past 10 wks, that has raised concerns that record-high government financial aid and the Fed’s super-low interest rate policies, when the economy is already growing elevates the risk of accelerating inflation.

In May, consumer prices rose 5% from a yr earlier, the largest such Y-Y jump since Y 2008.

Many economists see the recent spike as temporary. Others say they worry that higher consumer prices will persist.

Jason Furman, a Harvard professor who was Mr. Hussein Obama’s Top economic adviser, thinks the reality is more complex. He lean in to the higher-inflation-will-persist camp.

Mr. Furman notes that while most economists expect inflation to slow from its current quickened pace, not all think it will fall back to the Fed’s preferred level of 2% a year.

He opined: There are 2 scenarios for the Fed. The most likely 1 is that our unemployment rate is quite low in Y 2022. Inflation is running above trend. And so the choice is easy. The Fed has achieved their maximum employment mandate. They raise rates. The bad scenario for the Fed would be the unemployment rate remains elevated and inflation is running at 3% and then their dual mandate will be pulling them in different directions.

Mr. Furman does not know how the Fed would resolve that.

Note: Rather than prices going up because of rising demand, as in demand-pull inflation, cost-push inflation causes prices to go up because of the supply side of the equation. Stay tuned…

Have a positive day, Keep the Faith!