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Home > Coronavirus > CHART OF THE DAY: Inflation poses little risk to the U.S. economic outlook

CHART OF THE DAY: Inflation poses little risk to the U.S. economic outlook

Jan. 13, 2021 by Joseph Brusuelas

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The inflation rate ticked up to 1.4% in December and the yield on 10-year Treasuries remained above 1% for the sixth straight day on Wednesday. These levels should be considered small victories in the normalization of the economy after a rough nine months of the pandemic.

At this point, rent for shelter continues to deflate and a variety of core metrics that are sensitive to monetary policy remain well below the central bank’s target of 2%.

This implies that there is plenty of fiscal and monetary space to support the post-pandemic economic recovery and underscores our view that the Federal Reserve will not lift its policy rate, which is effectively at zero, until 2024.

Inflation has not been an issue since the 1990s. With energy prices and wage gains continuing to moderate, inflation expectations continue to coalesce around the 2% target.

This outlook can be explained by a combination of the advancement of monetary policy, technological advances in both fossil fuel extraction and alternative energy and conservation, as well as the development of the global supply chain and a global labor market.

We have made the case for some time that changes in the underlying structure of the U.S. economy permit it to run above the long-term trend growth rate of 1.8% for several quarters without generating significant inflation. Recent inflation data continue to underscore that view.

At the same time, excessively low rates of inflation are symptomatic of insufficient demand and low-growth economies (think Japan). That the inflation rate has moved from 0.1% in May to 1.4% at the end of the 2020 gives hope that the economy will avoid a deflationary spiral and a recessionary relapse.

This is one reason why we think the coming increase in fiscal outlays will not increase the risks to the domestic economic outlook linked to inflation or interest rates.

For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.

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Filed Under: Coronavirus, Economics Tagged With: coronavirus, Covid-19, inflation, Joseph Brusuelas

About Joseph Brusuelas

@JoeBrusuelas

Joe Brusuelas, “chief economist to the middle market,” is the preeminent voice championing issues and policies facing midsize companies in the United States and around the world. An award-winning economist, Brusuelas has more than 20 years’ experience analyzing U.S. monetary policy, labor markets, fiscal policy, international finance, economic indicators and the condition of the U.S. consumer.

A member of the Wall Street Journal’s forecasting panel, Brusuelas regularly briefs members of Congress and other senior officials regarding the impacts of federal policy on the middle market and the factors by which middle market executives make business decisions. He also frequently offers his insights on the U.S., Canadian and global economies in the financial media. In 2020, he was named one of the 100 most influential economists by Richtopia.

Before joining RSM in 2014, Brusuelas spent four years as a senior economist at Bloomberg L.P. and the Bloomberg Briefs newsletter group, where he co-founded the award-winning Bloomberg Economic Brief. Earlier in his career, he was a director at Moody's Analytics covering the U.S. and global economies for the Dismal Scientist website. He also served as chief economist at Merk Investments L.L.C. and chief U.S. economist at IDEAglobal.

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