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Economic Forecasts

Stimulus Is a Recipe for Inflation

Economist Mark Zupan, dean of the Simon Graduate School of Business, thinks excess bank cash and the Fed's flood of money guarantees inflation will take off.

By Mark Zupan

Our nation is flirting with resurrecting inflation to levels that are reminiscent of the grim 1970s. A high rate of inflation will, among other things, penalize savers, pensioners and working people, whose raises and cost-of-living adjustments -- if they get them -- cannot keep up with rising prices.

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The root cause of the coming inflation is the Federal Reserve’s easy-money policy in support of the federal government’s stimulus efforts. Rising government spending has been rapidly swelling our debt (now more than $14 trillion). Moreover, the Fed’s actions work to erode the U.S. dollar’s purchasing power. Over the past three years, the dollar has been devalued against many leading currencies, with the notable exception of the troubled euro. A weak dollar means imports become more expensive.

In addition, with more dollars now chasing fewer goods and services, the prices of those goods and services have begun to rise. Based on producer-price increases registered so far this year, we could see consumer prices increasing at a 6%-plus clip later this year.

All of this is occurring as banks sit on $1 trillion of reserves that they have not loaned out. Once they feel more confident about lending and this money hits the economy, it will add to inflationary pressures.

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Some people say that inflation is not a risk because of slack employment and because the consumer price index has been rising only modestly. However, the core CPI excludes food and energy -- goods that are used by every household.

Oil prices are especially vulnerable to further spikes because of the turmoil in the Middle East and North Africa. Given that Libya accounts for 2% of the world’s oil supply and that other still-feudal governments in the Middle East are under growing pressure to democratize, the near-term potential for explosive increases in oil prices is real.

Any such shocks will translate into rising prices for food and other goods and services. That will only exacerbate the inflationary pressures that our monetary policymakers have set in motion.

What’s your take? Please join the discussion about inflation on our Facebook page or in the comment box below.

Economist Mark Zupan is dean of the Simon Graduate School of Business, University of Rochester.

GO BACK TO OUR INFLATION DEBATE MAIN PAGE: WILL INFLATION TAKE OFF?

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