Long-term US Inflation?

Inflationary fears have returned to the US, as the worst of the pandemic comes to an end. Following periods of expansionary economic policy, fears of excessive inflation have naturally always arisen – as was the case in 2017, following the expansionary tax reductions passed by the Trump Administration. However, given the sheer amount of stimulus that was introduced during the coronavirus pandemic, on both fiscal and monetary fronts, these long-term inflation fears are justified.

The response to the Coronavirus outbreak

The CARES Act was the first stimulus package signed into law, passing both the Senate and the House of Representatives in March 2020, providing $2 trillion in aid to businesses, state and local government. A month later, additional economic stimulus followed, with the passage of the $483 billion, Paycheck Protection Program and Health Care Enhancement Act, containing $321 billion for additional ‘forgivable small business loans.’

Excessive deficit spending continued for the rest of the year, with an $868 billion coronavirus relief bill passed in late December of 2020, which included a payment of $600 to each individual – regardless of income and wealth. Most recently, newly-elected President Biden signed the American Rescue Plan into law, containing $1,400 in further stimulus, albeit means-tested.

The Federal Reserve similarly took swift action, as the virus began to take hold in the United States. The Federal funds rate was reduced by 1.5% to 0-0.25% in March 2020. This was coupled with quantitative easing, first witnessed in 2008 following the sub-prime mortgage crisis and subsequent Great Recession; $80 billion in Treasury bonds were purchased, alongside $40 billion in mortgage-backed securities, in each month after March. The purchases of these Treasury bonds are estimated to have reduced interest rates by approximately 0.6%.

Moreover, the Federal Reserve introduced two new programs – the Corporate Bond Program and the Main Street Lending Program. The former unsurprisingly involves purchasing corporate bonds, designed to improve liquidity conditions in the process. The latter was introduced to provide support to small and medium-sized businesses, that were previously in sound financial condition, before the pandemic. This was to be achieved through encouraging banks to lend to said enterprises through purchasing 95% of new/existing loans, with the issuing bank holding 5%.

Incoming Inflation

The stimulus packages that were outlined previously, have caused a dramatic growth in the US money supply. With Federal Reserve Chair Jerome Powell himself stating that the money supply receives little attention, this shouldn’t be a surprise to anyone. Vast increases in the money supply have historically led to greater inflation, with asset-price inflation being the first to follow. As economic activity grows, the prices of goods and services increase, with this process commencing a year following the initial injection of money. The start of said process is being witnessed now, with more inflation set to follow in the coming months.

The growth of the money supply, following the aforementioned coronavirus stimulus measures, has been astronomical. By the end of 2020, the rate of growth reached just shy of 29%, compared to an average of 6.5% over the past decade. As witnessed in the 1970s, in both the UK and the US, vast increases in the money supply only lead to inflation. This is due to more money chasing a limited number of goods, with the rate of money growth outpacing that of economic output.

Growth rate of the Money Supply over the past decade

The Biden Administration’s plans will not help in the fight against inflation. The unfunded $1.8 trillion infrastructure plan that is currently being proposed will only exacerbate the upcoming crisis, by further increasing the money supply.

Given all this, it is unsurprising that since the start of 2021, the inflation rate has only increased, with the CPI reaching 5.4% last month – the highest level since 2008. These warnings are simply a sign of what’s to come.