Economists Deeply Divided When Asked About Future Inflation.

Some economists say the inflation rate will soon fall. Others say the rate will rise.

Because of obvious uncertainty. forecasting future activity is always tricky. Usually, forecasters look to the past, noting previous outcomes when certain events occurred. If it turned out that way before, then it’s probably going to turn out that way again.

The issue is a bit more complicated for economists because human behavior is many times inconsistent. For instance, if a consumer sees a higher price for a product will she pay the higher price or will she refrain from the purchase? In the past, she has done both.

Economists today are deeply divided regarding their forecast for future inflation. The Biden Administration and the Federal Reserve (Fed) believe that the inflation spike we have experienced so far this year is temporary and will subside once the economy is fully reopened. They expect inflation to be around 3% this year and drop in the future years.

Other economists say the current inflation is due to a number of demand related reasons, all of which will lead to even higher inflation in the not-to-distant future. They say we could see double-digit inflation which could lead to very restrictive monetary and a recession.

Who is likely to be right?

Since January prices have increased by 2.7%. If the current rate continues, inflation would be 6.5% for the year. The administration believes that the inflation rate will fall very low, perhaps to near zero for the remainder of the year, so that inflation would be in the 3% range for all of 2021.

There are essentially two reasons why an economy experiences inflation. One is the supply-side and the other is the demand side.

On the supply side, if there are not enough units of output produced to meet the demand, then the price mechanism in the marketplace rations the short supply. In other words, insufficient supply means the price rises and some people decide they won’t or can’t purchase at the higher price. But if output can increase to meet the demand, the price will fall back to its original position.