Federal stimulus impacts inflation, 'leads to higher price levels'

Federal stimulus measures have contributed to inflation and rising prices, but it is only one of a number of factors impacting the rate, according to a Houston-based economist.

And Jorge Barro, of Rice University, does believe the inflation rate will come down once those factors largely arising out of the pandemic are ironed out, and with some action on interest rates by the Federal Reserve.

Federal stimulus, supply chain snarl ups, rising house prices, consumer demand and monetary policies have all led to the U.S. posting one of the highest inflation rates among advanced economies.

The U.S. rate year on year in September was 5.4%, compared to other advanced economies hovering just over 3%. Emerging economies are recording inflation rates of around 6%, according to the International Monetary Fund (IMF).

According to a new report by the international body, it is expected the inflation rate will peak at an average 3.6% later this year before dropping to around 2% mid-2022, but there are risks that could keep it higher

"Sharply rising housing prices and prolonged input supply shortages in both advanced economies and emerging market and developing economies and continued food price pressures and currency depreciations in the latter group could keep inflation elevated for longer," the IMF states in their report, which is the second chapter of the World Economic Outlook called "Inflation Scares."

Consumer prices increased at a sharp rate in September as Americans paid more for food, rent and other goods, according to the latest Consumer Price Index published last week by the Bureau of Labor Statistics (BLS).

"The indexes for food and shelter rose in September and together contributed more than half of the monthly all items seasonally adjusted increase," the BLS reported.

Barro, a fellow in public finance at the Baker Institute for Public Policy, said the IMF had identified the issues that will have the most impact, and touched on all the critical points.

"Pent up demand, fiscal stimulus, accommodating monetary policy, disruptions in supply chain, disruptions in labor market – this is text book that leads to higher price levels," Barro said.

But whether inflation will persist after these issues are largely taken off the table will be down to expectations, whether people expect prices to remain high, Barro said.

This affects all sectors, suppliers locking in higher prices, employees expecting higher wages and consumers believing they will pay more for items over a prolonged period.

For now inflation expectations remain anchored, said Barro, a view echoed by the IMF.

Barro does believe "inflation will be transitory," that the factors driving inflation now will not persist.

"And even if expectations do end up elevated, do not think the Federal Reserve will turn a blind eye. They will take action. This will include the short-term winding down, its bond buying and possible hikes in the nominal interest rate," he said.

On a broad level, Barro said all the projections suggested that there would be quick return to economic growth without the need for a fiscal stimulus.

But he added that on a micro-economic level, it was a huge help to many families in difficult circumstances.

The IMF also highlighted government spending, among other factors, that "could un-anchor expectations and spark a self-fulfilling upward spiral for prices."

"Longer-term government spending commitments and external shocks could also contribute to expectations becoming de-anchored," he said.