The Inflation Debate That’s Roiling U.S. Markets Faces 2021 Test
They’re still in the minority, but investors and economists who think America is in for a bout of inflation -- perhaps a serious one -- start the year with some fresh ammunition for their arguments.
Vaccines hold out the prospect of an end to pandemic restrictions that could bring consumers roaring back. It’s what economists call pent-up demand –- a label that applies quite literally right now. The incoming Biden administration will likely prop up household spending with more financial aid, after Senate elections this month gave Democrats a majority. And in the background, the dollar has been weakening and commodity prices rising steadily for months.
All this has pushed bond-market measures of expected inflation higher. The so-called breakeven rate on 10-year Treasuries climbed above 2% this past week to the highest in more than two years.
Still, the predominant view among economists -– including, crucially, at the Federal Reserve –- is that it will be years before the U.S. has to worry about inflation.
Data due on Wednesday is expected to show that consumer prices increased 1.3% in 2020. With costs rising for producers, almost everyone forecasts a higher rate this year. But even by the end of 2022, the Fed’s preferred measure won’t exceed its 2% target, according to economist surveys. And Fed officials say they want to see inflation stay above that level for a while before they’ll raise interest rates.
Inflation skeptics point to job markets still depressed by the virus, deeper trends in demographics and technology that keep prices down, and the risk that politicians will cut off support for the economy too early -- as they’ve done in the recent past.
So is inflation on its way back? Here are some of the key arguments on each side.