Inflation is a ticking time bomb for the U.S. economy and its persistence may cause a crisis in coming years, Deutsche Bank economists have warned.
In a report released on Monday, economists said sacrificing inflation fears on a pedestal of focusing on stimulus could prove to be a big mistake by 2023 and beyond.
Federal Reserve Chairman Jerome Powell has repeatedly reassured the markets that elevated inflation readings are probably “transitory,” and will settle back over time as the economy recovers from the 2020 pandemic-induced recession.
The Fed has refrained from hiking interest rates despite inflation projected to exceed the 2-percent target it set for the economy, saying it will let price growth run hotter than usual in hopes of driving a stronger recovery and tighter labor market.
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In April, consumer prices went up the most since 2008 as demand for goods increased with the reopening of the U.S. economy. This demand pushed against supply constraints, exacerbating financial market fears of a long period of higher inflation.
“The consequence of delay will be greater disruption of economic and financial activity than would otherwise be the case when the Fed does finally act,” wrote Deutsche Chief Economist David Folkerts-Landau.
“In turn, this could create a significant recession and set off a chain of financial distress around the world, particularly in emerging markets.”
The economist at Germany’s largest lender said the U.S. might be headed for one of its worst inflationary periods in history, arguing that elevated government spending and loose monetary policy could combine to create conditions similar to prior episodes in the 1940s and 1970s.
The inflationary pressure will be largely due to the release of $2 trillion in “excess savings” that consumers have amassed over the past year when many businesses were closed and travel was shut down, the economists wrote.
“Consumers will surely spend at least some of their savings as economies reopen,” wrote the Deutsche Bank economists. “This raises the very real specter of consumer-driven inflation.”