Agenda 11-04-2021; 12-5 - Information Item - Financial Report - First Quarter FY 2021-22

Browse Search

16 devastating collapse in the economy along with tremendous misery and loss would have occurred. If allowed to happen, it could have taken the economy years to recover. Inflation is another worry about the post-pandemic economy. Figure 6 shows three alternative measures of inflation. The "total" inflation rate is the official rate. It is based on tracking prices of thousands of commonly purchased consumer products and services. Each price is weighted by the importance of its product or service in the typical household budget before combining all the price changes into a total inflation rate. The "core" inflation rate is the rate after excluding volatile food and energy prices. The "trimmed" inflation rate is the rate after excluding the 8% of products and services with the highest price increases and the 8% of products and services with the lowest price increases. In recent years the official inflation rate was no higher than 3% and stayed below 2% for most of the period. The "core" and "trimmed" rates hovered around 2%. But since 2020, all three measures have trended higher, with the official rate rising above 5% (annualized) in early 2021. There are two explanations and two forecasts for inflation. One says the higher recent inflation rate is temporary because it is based on supply-side disruptions caused by the pandemic that have not yet been repaired. Once these disruptions are fixed,the inflation rate will subside to its recent I%to 2% annual rate range. At most, the higher inflation rate will last until early 2022. The second explanation doesn't deny supply-side disruptions, but puts more focus on the demand side. As already shown, the $6 trillion federal financial aid program has put tremendous financial resources in the hands of households and businesses. As the pandemic hopefully recedes and people act on their"pent-up demand" (desired spending that was delayed during the pandemic), it is expected spending will surge. Even with a repaired supply chain, desired spending will exceed the supply of products and services. The result is a faster rise in prices. This explanation sees the elevated inflation rate persisting well into 2022, with the peak rate possibly reaching at least 6%. Before turning to the third worry, it should be noted the Federal Reserve (Fed) has a role in both the debt and inflation worries. The Fed has supported both the financial aid provided by the federal government as well as the recovery in the private sector in two way. One is by purchasing the new federal debt by increasing the money supply (Figure 7). Second is by keeping the key interest rate the Fed controls very low. Both efforts could be considered as inflationary. At some point the Fed will reverse course and sell some of its federal debt and increase its key interest rate. While these actions could help contain inflation, higher interest rates would elevate federal debt payments and potentially slow the economic recovery. The third worry is about the labor market. The recovery from the 2008-2009 recession was termed the "jobless recovery" due to the slow increase in jobs and the lingering high 10