The United States experienced short bursts of inflation in some prior periods of pandemics or large-scale reallocations of economic resources, such as in 1918-driven by the Spanish Flu and demobilization from World War I-as well as the demobilization from World War II after 1945 and the resurgence in defense spending due to the Korean War. Pandemics of the magnitude of COVID-19 are, thankfully, rare, but that also means few historical parallels exist to inform policymakers. Overall inflation, as defined by the Personal Consumption Expenditure (PCE) deflator, then fell further during the pandemic, though there have been important differences between products and sectors (see figures below). Indeed, one piece of important context around the current inflation risks is that inflation was generally weaker than the Federal Reserve’s target over the decade prior to the pandemic as the economy recovered from the Great Recession. But inflation that is persistently too low leaves monetary policy with less scope to support the economy and can be a sign the economy is below its capacity, thus with room to expand jobs further. Inflation that is persistently too high can hurt the wellbeing of households, especially when it is not offset by comparable increases in wages, leading to reduced buying power. Inflation-or the rate of change in prices over time-is not a simple phenomenon to measure or interpret. One risk the Administration is monitoring closely is inflation.
Pandemic warroom full#
While the paramount policy goals are to control the virus, get to full employment, and make the necessary investments for a more resilient and inclusive recovery, economic uncertainties and risks demand careful attention going forward. The COVID-19 pandemic has caused an unconventional recession, and we do not expect the recovery will be typical either.
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