Money Matters, Simplified.
Fiscal stimulus to increase inflation: Survey
by Jaspreet Virk - August 31, 2009 - comments
Even the American consumers have projected a 2.8 percent rise in inflation per year for the next five years, according to the Reuters/University of Michigan sentiment survey
New York, August 31: The trillions of dollars pumped into the U.S. economy will accelerate inflation later this decade, according to the survey of business economists.
The median estimates of the poll conducted by National Association for Business Economics (NABE) highlighted that prices will rise 3 percent a year on average from 2014 through 2018.
The survey was conducted between August 3-18 and 266 members took part in the poll.
Rationale behind increasing inflation
The government had earlier this year injected a $787 billion into the economy and separately bailed out banks to revive the struggling financial system. As a result, the budget deficit increased to $1.58 trillion in fiscal 2009.
Further, the government’s plan to revamp the U.S. healthcare system, which is priced at $1 trillion, has raised concerns as most economists doubt if it could lower cost, increase accessibility while maintaining quality.
The economists have cited reasons for concerns over inflation. These include "lagged effects of policies now in effect," "monetization of the debt" and "ineffective exit strategy" by the central bank, the report stated.
The Fed has also cut interest rates almost to zero to prevent lending from freezing. Fifty-six percent of the economists in the NABE survey said that the interest rate will remain near zero for at least the next six months.
“An excessively stimulative fiscal policy and a complicated exit from its quantitative easing policies over the medium term will result in the Fed tolerating a higher level of inflation than it desires,” the NABE report said.
Even the American consumers have projected a 2.8 percent rise in inflation per year for the next five years, according to the Reuters/University of Michigan sentiment survey.
Second fiscal stimulus not required
Though the economists believe that the $787 billion stimulus package has reduced the pace of economic decline, majority said a second stimulus package was not needed and believed that government should instead cut spending.
"Fully 76 percent do not believe a second stimulus package is needed. Three-quarters responded that they would like to see fiscal policy become more restrictive over the next two years, but only 28 percent expect that it will be," the NABE said.
About half of the economists surveyed stated that fiscal stimulus would add between half to 1.5 percentage points to gross domestic product (GDP) growth and a third believed the addition to GDP would be less than half a percentage point.
The economists favored increase in regulation of financial markets, consolidation of regulators and revamp of credit rating firms as the measures to improve financial stability.