With more stimmy checks ready to be doled out soon, more central bankers appear to be worried about inflation. Should you be concerned, too?
First off, what is inflation?
Inflation is defined as the rise of the overall prices of goods and services over a certain period in time. It is gauged mainly through CPI and PPI readings.
Rising price levels means that the purchasing power of a unit of currency declines.
For instance, if a dollar bill can buy you two cones of ice cream in the 90s and just one cone of ice cream (with no sprinkles!) in 2020… that’s inflation yo!With inflation eating up the value of money, that can’t be too good for your hard-earned cash, right? This is one of the many reasons why central banks are set on keeping price levels stable through their monetary policy tools.
But wait, what causes inflation?
Most economists say that inflation is caused primarily by the imbalanced growth of money supply with respect to the rate of economic expansion.
BO-RING!
To put it another way, price levels typically rise when there’s barely any economic growth but “free cash” is being doled out like there’s no tomorrow.Sound familiar?
In case you missed it, U.S. President Biden is pushing for $1.9 TRILLION in stimulus to combat the impact of COVID-19 on the economy. This is on top of the $900 billion aid package approved by Congress last December and the $3 trillion in relief around the start of the pandemic.
Of course, with so much more cash floating around, this raised plenty of concerns about potentially uncontrollable inflation.
So, should you be worried?
Harvard University professor and former U.S. Treasury Secretary Lawrence Summers warned that excessive aid might trigger “inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability.”
Although the Fed can decide to hike rates to mop up extra liquidity, some analysts warn that widespread economic weakness might make it impossible for the central bank to scale back its accommodative policy at the same time.Current Treasury Secretary and former Fed Chairperson Janet Yellen assured in a television interview “I’ve spent many years studying inflation and worrying about inflation. And I can tell you we have the tools to deal with that risk if it materializes.”
If my homegirl Yellen says “Don’t worry, I got it.” and current Fed head Powell also doesn’t seem to be in a rush to tighten policy, then there might be no cause for concern.
More stimulus could even be a plus for the Greenback if it does wind up giving the economy a much-needed boost while also upping Fed hike expectations. What do you guys think?