Will Higher Inflation Affect US Macroeconomic Performance?

Summary

  • Economists have warned if inflation persists, the situation could get worse.
  • Rising inflation could impact key macroeconomic parameters like growth, GDP, and employment.
  • Given the central bank’s mandate to maintain inflation typically at around 2%, speculations are rife that it may announce policy prescriptions in the coming days to cool down spending.

Americans are already paying more for their daily expenses. The latest CPI data couldn’t have come at a worse time for people already battling a raft of challenges from energy shortage, covid, manufacturing logjams to supply disruptions.

The US Consumer Price Index (CPI) climbed 4.2% in April, the fastest annual pace since 2008. While inflation may seem normal in recovery, its persistent rise may impact the broader economy. The weakening currency will add more pressure on the markets and the government.

Higher inflation means higher government expenditures. The Biden administration has announced massive outlays on various developmental projects and social security programs, including trillions of dollars in covid-related stimulus packages. Still, these expenses could go up in the coming days.

Economists have warned if inflation persists, the situation could get worse.

Also Read: US Consumer Prices Rise By 4.2%, The Fastest Pace Since 2008

The Federal Reserve has conceded inflation to rise persistently over the next few months. Rising inflation could impact key macroeconomic parameters like growth, GDP, and employment.

The currency market is likely to face the heat. The US dollar futures were down 0.08% on Wednesday. The stock markets pulled back as investors kept away from the growth stocks.

Pic Credit: Pixabay.

Will Fed Hike Rates?

Given the central bank’s mandate to maintain inflation typically at around 2%, speculations are rife that it may announce policy prescriptions in the coming days to cool down spending. Also, higher interest rates will make the greenback more desirable.

The central bank may be forced to relook at the interest rates in the light of the latest CPI data despite its assurance on lower rates in the past, a critical issue that will be on top of everyone’s minds. It may also review its policy on bond purchases worth around US$120 billion every month.

Also Read: Now Google Pay Users In US Can Send Money To India, Singapore

However, the Fed believes the current inflation is transitory. It is hoped that when the stimulus checks stop in early September, the inflationary pressures will start to settle down.

But if it proves sticky, the Fed will have a tough time battling it out, say economists. Interestingly, the sharp rise in inflation also indicates the extent to which prices fell last year due to covid.

The current inflation will not have a debilitating effect on the macroeconomy, but it can, if it lasts longer, they say. However, irrespective of inflation, which is typical in a rebound, the US economy will continue to expand as the covid situation normalizes.

Also Read: US Stock Market Tumbles As Inflation Peaks 13 Year High

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