Fiscal Stimulus And Inflation

The answer depends on how well the deflationary forces ie.

Fiscal stimulus and inflation. Record fiscal and monetary stimulus has renewed concerns that inflation could surge. With control over both legislative houses. Weak demand could continue to put downward pressure on prices despite some supply shocks.

The gist is that higher oil prices forced people to reduce consumption of oil or of other goods which increased unemployment. In that case fiscal stimulus might be a way of boosting aggregate demand. As inflation and interest rates rose economist milton friedman s thesis that inflation is always and everywhere a monetary phenomenon drove the federal reserve to target money supply growth in the 1980s bringing inflation down.

Hence only monetary stimulus could work. Inflation expectations rose on wednesday in anticipation of more fiscal stimulus after democrats secured control of the senate. New york reuters u s.

The united states responded with an economic stimulus driving up inflation. Many investors remember the 1970s when inflation rose sharply on the back of expansive fiscal and monetary policies. Slower velocity of money and the decrease in gdp due to closures are balanced against the inflationary forces of the stimulus.

Counter arguments say that if the output gap is high enough the risk of inflation is low or that in depressions inflation is too low but central banks are not able to achieve the required inflation rate without fiscal stimulus by the government. So back to the question will the 2 trillion covid 19 stimulus cause inflation. But fiscal stimulus is not the only way of raising inflation even at the zero bound.

To see why let s go back to 2009 when inflation was roughly zero i e.