Is “Running Hot” Inflation Wise And Humane?

Is “Running Hot” Inflation Wise and Humane?

  • “To me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target.” – Janet Yellen
  • To me, the weather is perfect when it’s 75 degrees.”

Both statements have some truth to them but severely lack context.

Even if it is 75 degrees, can I call it a perfect day if a hurricane is bearing down with torrential downpours and 150 miles per hour winds?

Letting inflation rise “above target” may have some benefit, but the rate at which incomes are changing versus inflation and its effect on confidence is far from inconsequential.

Yellen’s comments align with most Fed members who wish to see inflation run “hot.”

In this article, we explore the consumer’s plight and whether letting inflation run “hot” is a wise and humane way to keep the economic recovery rolling.

What’s Supporting the Economic Recovery

The robust economic recovery is in part the result of nearly $5 trillion in deficit spending.

To grasp how the government supported the economy, consider the graph below. The orange line is total personal income. After the second set of direct payments to citizens went out in March, personal income was 25% more than before the Pandemic.  The blue line shows organic income, or that earned solely through employers. The difference, the gray area, is payments from the government, known as transfer payments. These direct benefits represented nearly a third of income on multiple occasions over the last year. 

inflation, Is “Running Hot” Inflation Wise and Humane?

Personal consumption represents nearly two-thirds of economic activity (GDP). Over the last six months, consumption was significantly boosted by stimulus programs. Further, the government allowing forbearance of rent, mortgage, student loan, and utility payments provided many with additional money to spend.

Resulting from surging income and reduced liabilities, retail sales are running about 15% above the trend of the prior decade. For historical recessionary context, consider retail sales fell by about 13% from its trend during the 2008 recession.

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