Fears that inflation could spiral out of control due to a massive US stimulus package are overblown, IMF chief economist Gita Gopinath said Friday.
Her argument contradicted critics of US President Joe Biden’s proposed $1.9 trillion rescue package for the world’s largest economy, who say the amount is excessive, and even those Democratic economists who have also raised concerns about price spikes.
Gopinath estimated that with the full amount of stimulus, inflation “would reach around 2.25 percent in 2022, which is nothing to be concerned about,” she said in a blog post.
Some economists, including former Treasury secretary Larry Summers, have urged caution saying excess spending could spark an inflationary spiral that the Federal Reserve would find difficult to control.
Rising prices would erode purchasing power and higher interest rates to control inflation would send the cost of borrowing soaring in an economy already awash in debt amid the coronavirus pandemic.
Gopinath noted the “concerns about an overheated economy that could push inflation well above the comfort zone of central bankers.” But she said “the evidence from the last four decades makes it unlikely.”
In the wake of the global financial crisis, US annual inflation barely cracked the Federal Reserve’s 2 percent target, and in December the rate was just 1.3 percent.
And Gopinath said the government aid will push US GDP up five to six percent over three years, which would recoup the 3.5 percent contraction in 2020.
The IMF has consistently supported a large US stimulus plan to recover from the Covid-19-induced recession that has left millions jobless.
US Treasury Secretary Janet Yellen late Thursday repeated the administration view that “the price of doing too little is much higher than the price of doing something big.”
Yellen noted that inflation has been very low for over a decade, and while it remains a risk “it’s a risk the Fed and others have tools to address.”
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