As the inoculation progresses at a high speed, reopening of major cities and numerous sectors of economic activities, it is fair to say that the economy is now recovering and nearly booming. But this brings the market into another problem as the inflation fear looms. Are the low interest rates and free cash from stimulus policies fostering an economic bubble?
Inflation happens when the price of goods and services increases. The most well-known indicator of inflation is the Consumer Price Index (CPI), which measures the percentage change in the price of a basket of goods and services consumed by households. At the time of writing, Labor Department of United States figures showed a 0.8% jump in prices in April and 0.6% rise in May, marking the two biggest monthly increases since 2019.
And just in time for summer, most cities are lifting their Covid-19 restrictions by allowing people to go back to the office and travel. As spending power increases when more restrictions are lifted and life gets back to normal, the demand for goods rises, stoking further price gains hence fueling the potential for inflation.
The current goods supply, such as computer chips that are needed for electrical manufacturing is obviously not sufficient to cover the demand surge as the pandemic threat recedes. Some significant reasons that have caused the respective outcome are the lack of labour force resulting from the layoffs of workers during Covid times when factories are closed. Indirectly disrupt the global supply chain.
Huge volumes of liquidity being fueled by government stimulus and near-zero rates are overheating the market and making investors anxious about the direction the economy is heading. This put central banks in a difficult spot to handle the market, control inflation rate while not devaluing the dollar and terrifying investors.
Albeit Jerome Powell acknowledges that “inflation has increased notably in recent months” but he continues to emphasize that this phenomenon will be transitory. In their words, post-pandemic economic rebound is common and should not be overly panicked.
However, discussion on scaling back bond purchases and Covid relief packages which aimed to help foster smooth market functioning will be conducted to ease down the flow of cash into the market. This is because the Fed chair also acknowledged the uncertainty around that view in which he says “I will say that these effects have been larger than we expected and they may turn out to be more persistent than we expected.”.
It is worth noting that the economy screeched to a halt in record speed a year ago, and with the end of the pandemic seems brighter than ever, it is now revving up quickly to the fastest growth in decades. But the question is will this lead us to a better economic prospect or is it just building up another financial catastrophe?