I’ve lately been arguing that financial markets could be in for a surprise in the form of higher‐than‐expected U.S. inflation. But let me be clear: This doesn’t mean that it will spiral out of control or soon undermine the post‐pandemic recovery.
Many forces are converging to push prices upward. The Biden administration and Congress are preparing a big fiscal stimulus package, and the Federal Reserve is aiming to provide enough monetary stimulus to push the inflation rate above its 2% long‐term target. Meanwhile, the gradual easing of social distancing is set to release a lot of pent‐up demand for everything from restaurants to travel and tourism, which recession‐damaged businesses‐‐many oriented toward a pre‐pandemic economy‐‐will initially struggle to satisfy.
So inflation is likely to head higher. But let’s not overreact. There are also plenty of reasons to believe that things won’t get out of hand, at least not quickly. First, the economy is still a long way from operating at capacity, the point at which inflation pressures are likely to become problematic. The U.S. is still about 10 million jobs short of full employment‐‐a gap that will take time to close, as people who have stopped looking for work come off the sidelines and back into the labor force.
