Published June 10, 2021
Inflation continues to gather strength, rising to 5 percent in May compared with a year ago. Though the Federal Reserve assures us that this is merely a temporary increase thanks to last year’s pandemic-related drop in demand, that’s likely to be a case of putting wishes ahead of reality.
The Fed reasons that our current spate of price increases is merely a case of returning to normal after an unprecedented economic shutdown. Prices dropped during the lockdowns last spring as people simply couldn’t go out and shop as they once did. Oil prices plummeted as producers sat on massive stocks they couldn’t sell because automobile use dried up. Comparing this May’s prices with last May’s, then, is a bit artificial because of the artificial conditions that pertained then. The official view is that once economic conditions are back to roughly normal later this year, price rises should also moderate and eventually tail off.
This is perhaps the greatest example in decades of looking at the economy through rose-colored glasses. The fact is that individuals and businesses are sitting on record levels of cash because of the unprecedented stimulus that Washington pushed out the door last year and this January. This has led to a massive increase in bank deposits, which have soared from $13.4 trillion just before the pandemic to $17.1 trillion today. That $3.7 trillion increase in just one year is unprecedented. Bank deposits rose only a few hundred billion dollars a year even after the Great Recession. This money won’t sit forever; it will have to go somewhere.
Henry Olsen is a Washington Post columnist and a senior fellow at the Ethics and Public Policy Center.