Phantom of the 70s, inflation attempts a return to the United States

The good news: the US economy is preparing for months of euphoria in the spring, when a large part of the population will have been vaccinated.

The bad news: this renewed dynamic in economic activity could push prices up. Some economists and the markets fear a return of inflation, the bĂȘte noire of the 1970s in the United States.

Will we soon have to add a zero, or even two, to the price of a bottle of milk?

– Why do we expect prices to rise?

It is a combination of several factors, which should form an explosive cocktail.

The economy will pick up gradually from the spring, thanks to the vaccination campaign, and because some of the Americans – the wealthiest – have a lot of money to spend.

In fact, for a year now, they have traveled little, eaten little in restaurants, hardly frequented bars or gyms, which has enabled them to save money.

The US federal government for its part distributed trillions of dollars of public money, in the form of checks sent to households, or more generous unemployment benefits.

The savings rate in the United States, which hovered around 7-8% before the crisis, is now 20.5%.

The spark should be, according to economists, the new stimulus package wanted by Joe Biden, which could be adopted in Congress in the coming days. These 1.9 trillion dollars will further boost household savings, which will then be ready to draw green bills and bank cards as soon as they can safely exit again.

Faced with these consumers with full pockets, it is not sure that the supply is sufficient to meet the demand. There would therefore be an overheating of the economy. Consequence: prices could rise substantially. Certain sectors are already under strain, such as the automobile industry, which is also facing a global shortage of electronic chips preventing factories from operating at full capacity.

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– What would be the impact of inflation?

If this possible rise in prices were too high and continued, there could be a loss of household purchasing power.

“What we fear is an inflationary spiral,” in which “we consume today for fear that prices will rise tomorrow,” said Gregory Daco, analyst for Oxford Economics.

A vicious circle, therefore, in which inflation feeds itself and gets out of control.

– What can we do ?

The main answer would be “entirely on the Fed’s side,” the US Central Bank, explains Gregory Daco.

The powerful Central Bank should end its policy of supporting the economy put in place when the pandemic paralyzed the economy.

On the one hand, it will have to stop flooding the markets with liquidity via asset buybacks. And will have to raise its key rates, currently almost zero. These rates have an influence on various credits and loans granted by commercial banks to individuals and companies.

A rate hike is likely to curb consumption, which alone accounts for two-thirds of US GDP.

Is the Fed ready to act? Jerome Powell, its president, repeated this week that the institution will maintain its support for the economy because the labor market is still far from recovering.

He insists that the real unemployment rate is 10% when we take into account the unemployed who have stopped looking for a job, well above the official rate of 6.3%.

Prices will certainly increase for several months, but “this is a different thing from the persistent high inflation, which we do not expect to see,” he told parliamentarians last Wednesday.

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According to him, we will therefore have a rise in prices, that’s for sure, but not the galloping and out of control inflation that the country experienced in the 1970s after the oil shock.


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