IMF Sees Limited Inflation Risk From Biden’s $1.9 Trillion Plan


The International Monetary Fund is weighing in on the debate over U.S. President Joe Biden’s $1.9 trillion stimulus proposal, saying that it sees only limited inflation risk, a rebuttal to some critics who worry about the American economy overheating.

The past four decades of experience suggest that any surge in U.S. price pressures is unlikely to push inflation persistently above the Federal Reserve’s 2% inflation target, IMF chief economist Gita Gopinath wrote in a blog on Friday. She noted relative stability in inflation from 2009 to 2019 even as wages rose amid a sharp drop in unemployment, and said that the headline U.S. jobless rate, now 6.3%, understates gaps in employment.

The fund estimates that Biden’s proposed package, equivalent to 9% of gross domestic product, would increase U.S. GDP by a cumulative 5% to 6% over three years, with the Fed’s inflation measure quickening to around 2.25% in 2022. That would be in line with the Fed’s new policy framework adopted last year, Gopinath said, referring to the central bank’s plan to sometimes allow inflation to run above the 2% target to make up for prior undershoots.

The comments inject the IMF into a debate that has seen prominent economists and market participants raise questions about the impact of the package. Lawrence Summers warned that a stimulus closer to the levels of World War II could spark inflationary pressures “not seen in a generation.” Treasury Secretary Janet Yellen argues that policy makers have the tools to deal with possible faster inflation, and that the greater danger is doing too little.

IMF Sees Limited Inflation Risk From Biden’s $1.9 Trillion Plan

IMF Managing Director Kristalina Georgieva earlier this month warned that the U.S. could face “a dangerous wave of bankruptcies and unemployment” if fiscal support isn’t maintained until there’s a durable exit from the health crisis.

Reports this week showed the U.S. economy is starting to display pockets of price pressures. Retail sales advanced the most in seven months, topping all estimates and indicating strong consumer demand at the start of the year. A gauge of producer prices surged last month by the most in records dating back to 2009, while a private survey of homebuilders showed growing concern about soaring costs of building materials after a robust year for home sales.

Factors that will help keep prices in check range from globalization, which has limited inflation in traded goods, to firms with room to adjust profit margins, Gopinath said. Automation, along with relative declines in the price of capital goods, has largely kept higher wages from being passed through to prices, she said.

Still, public spending should be well-targeted to deliver the same improvement in employment and output while taking on less debt, allowing more room for future spending with a high social return, Gopinath said.

The current crisis also has almost no parallel in history, making the use of past comparisons risky. Pent-up demand once vaccines are deployed could trigger strong recoveries and inflation that defies expectations based on evidence from recent decades, Gopinath said.

©2021 Bloomberg L.P.

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