IMF chief economist has ‘no concerns’ over inflation in US

Gita Gopinath, the International Monetary Fund’s chief economist, says that the inflation created by US president Joe Biden’s proposed stimulus plan “is nothing to be concerned about”.

In a blog post published on February 19, Gopinath predicts that the stimulus will cause inflation to rise to 2.25% in 2022. She says this will be consistent with current Federal Reserve policy. 

The Fed’s inflation target is 2%. However, in January the Fed modified the implementation of this policy. The Federal Open Market Committee stated that it intended “to achieve inflation that averages 2% over time”. Where inflation has fallen below 2% for an extended period, “appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time”.   

The US Bureau of Labor Statistics said that the US experienced 1.4% inflation in the year to January 2021. 

The Biden administration has proposed a stimulus package of $1.9 trillion. This is equivalent to 9% of US GDP. Gopinath suggests this will provide GDP growth of 5–6% over three years. The US adopted two earlier stimulus packages in 2020 –  $2.2 trillion in March, followed by a $900 billion package in December. 

Gopinath argues that several factors working to keep inflation low, including globalisation, tend to depress prices. The pandemic is likely to increase automation and central banks’ actions.  

Central banks still need “to follow sound principles in the conduct of policy”, Gopinath says.

She warns that market turbulence “could be triggered by the discovery of new virus variants, transitory swings in inflation, or the possibility that major central banks raise interest rates sooner than expected”.

Central banks need to ensure there are no sharp swings in borrowing costs caused by events like these. “They can do this with early and clear communications of their intentions,” she says.