US risks a surge in inflation

The vast monetary stimulus unleashed in the US has raised the spectre of higher inflation.

The US Federal Reserve might be ready to push inflation above the 2% target, reports Tim Duy on Bloomberg. The last decade brought low unemployment and low inflation, weakening faith in the “Phillips curve”, which posits a trade-off between the tightness of the labour market and price stability. Several Fed policymakers have recently suggested that instead of trying to use the curve to predict future inflation, the Fed should simply keep money easy until actual inflation overshoots the 2% target.

US inflation has practically disappeared in the slump, but the vast monetary stimulus unleashed to fight the pandemic has raised the spectre of higher inflation when the recovery arrives. The Fed’s balance sheet has grown from about $4trn at the start of the year to $7trn today because of pandemic-related stimulus.

Fed policymakers are probably right that the Phillips curve has “lost much of its predictive value”, writes Andrew Stuttaford in National Review. In a world of weaker trade unions and automation, even when unemployment is low, wages do not rise much. Yet the Fed is underestimating the damage that ultra-low interest rates can do, from weakening pension funds to creating an incentive for vast amounts of ill-judged investment across the economy. And history shows that when inflation goes over target it can be more difficult to rein it back in than people think. “I doubt this ends well.”

Recommended

The simple way to invest in iconic classic cars
Advertisement Feature

The simple way to invest in iconic classic cars

Alternative and passion investing are areas that have seen considerable growth in recent years, but some asset classes have priced investors out. Now,…
25 Nov 2022
7 ways to reduce your inheritance tax bill
Inheritance tax

7 ways to reduce your inheritance tax bill

The inheritance tax threshold cap has been extended until 2028, which will result in higher tax bills for many - we look at how to keep you inheritanc…
25 Nov 2022
Best junior stocks and shares ISA platforms
Isas

Best junior stocks and shares ISA platforms

A junior stocks and shares ISA is a great way to save for your child tax-efficiently. But it can be confusing deciding which investment platform to ch…
25 Nov 2022
Best savings accounts – November 2022
Savings

Best savings accounts – November 2022

Interest rates on cash savings are making a comeback. We look at the best savings accounts on the market now
25 Nov 2022

Most Popular

Wood-burning stove vs central heating ‒ which is cheapest?
Personal finance

Wood-burning stove vs central heating ‒ which is cheapest?

Demand for wood-burning stoves has surged as households try to reduce their heating costs this winter. But how does a wood burner compare with central…
21 Nov 2022
Fan heater vs oil heater – which is cheaper?
Personal finance

Fan heater vs oil heater – which is cheaper?

Sales of portable heaters have soared, as households look to cut their energy costs. But which is better: a fan heater or an oil heater? We put them t…
21 Nov 2022
Buying vs renting: as mortgage rates rise, which is cheaper?
Property

Buying vs renting: as mortgage rates rise, which is cheaper?

In the UK, buying a home has traditionally been the preferred option over renting. But is that still true? Rebecca Goodman asks: which makes more sen…
18 Nov 2022