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    Explained: What fans US inflation fears

    Explained: What fans US inflation fears

    Explained: What fans US inflation fears
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    By CNBCTV18.com  IST (Published)


    The sceptics may be off the mark about hyperinflation in the US. However, experts agree that inflation of 3-4 percent by 2022 seems likely.

    The US Labour Department recently released its jobs report after some delay. The department recorded only 266,000 new jobs while experts were expecting a million in the same time period.
    At the same time, headline inflation is expected to rise to 3.6 percent year on year as a result, triggering fears of a rapid inflation spike.
    What is the Inflation Worry?
    In simple terms, inflation is the rate of increase in the general price level of any economic system. It is calculated by comparing the price of certain goods and commodities like food, energy and fuel each year.
    Most central banks prefer to have a relatively stable yet positive level of inflation since it's better than the alternative of a recession.
    Inflation can prove to be really harmful at high levels when levels of wealth are quickly eroded by rapidly rising costs. Venezuela is currently in a state of hyperinflation with 3012 percent inflation rate, while countries like Sudan, Zimbabwe and Lebanon have very high inflation rates as well.
    Is the US Heading for Hyperinflation?
    While many sceptics believed that the Federal Reserve's policy of fiscal stimulus and quantitative easing -- which was implemented to ease the economic pressures caused by the COVID-19 pandemic -- would lead to hyperinflation. However, there has been no sign of that yet.
    According to study and research, hyperinflation only occurs in very specific circumstances, including in the aftermath of war, when fiscal authorities lose control; or as a result of populist monetary policies.
    The absence of hyperinflation does not rule out high inflation. Many experts believe that the US could see inflation of 3-4 percent by 2022. Even such a marginal rate can drastically reduce consumers’ purchasing power, cut down corporate margins and reduce the value of assets significantly.
    David Roche, president of investment firm Independent Strategy told CNBC, "We will see inflation of probably 3 or 4 percent by the middle of next year and that is completely inconsistent with, say, US 10-year bond yields being at 1.6 percent. That yield could easily double and when it does, then you come to the crunch point that markets are going to experience."
    He added, "The reason prices will rise and really there are a couple of things that you're going to end up with, on the other side of COVID, huge demand as consumers spend the excess savings which they have accumulated."
    Such inflation rates can negatively affect economic recovery to pre-pandemic levels. As purchasing power is eroded, supplies can't keep up and wages begin to stagnate. This is a problem that the US is not facing alone. Other countries like India might similarly be hit by high inflation that can dampen economic recovery this year.
    What Will the Government Do?
    The easiest way, at least in principle, to reduce inflation is to take money out of the economy. This can usually be done by increasing interest rates to reallocate the surplus money in the fiscal system.
    US Treasury Secretary Janet Yellen has stated that the government might be looking to do the same. “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is small relative to the size of the economy,” she said at an event hosted by The Atlantic magazine.
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