Inflation Will Accelerate This Decade, Business Economists Say

By Carlos Torres

Aug. 31 (Bloomberg) -- The Federal Reserve will be unable to prevent the trillions of dollars in government stimulus pumped into the U.S. economy from stoking inflation later this decade, a survey of business economists showed.

The price gauge tracked by the central bank will rise 3 percent a year on average from 2014 through 2018, according to the median estimate in a poll taken by the National Association for Business Economics. The rate exceeds the 2 percent pace that the respondents said was the Fed’s unofficial target.

The report is in line with surveys of consumers and indicates the central bank may have to work harder to damp inflation expectations after pouring more than $1 trillion into credit markets in a strategy known as quantitative easing. Economists in the survey also said the Obama administration’s $787 billion stimulus program would push consumer prices higher.

“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,” according to a statement issued by the Washington-based group today.

The price measure that tracks consumer spending and excludes food and fuel costs, the Fed’s favorite, rose 1.4 percent in July from the same month last year, the smallest gain since 2003, a Commerce Department report showed last week. The last time it exceeded 3 percent was in 1992.

Inflation Concerns

The main reasons cited for concern over the inflation outlook included “lagged effects of policies now in effect,” “monetization of the debt” and an “ineffective exit strategy” by the central bank, the report said. Only a “small percentage” thought a loss of Fed independence will cause prices to accelerate.

American consumers projected this month that inflation will rise 2.8 percent per year over the next five years, according to the Reuters/University of Michigan sentiment survey issued last week.

Fifty-six percent of the economists in the NABE survey said the Fed will keep the benchmark interest rate target near zero for at least the next six months, while 44 percent projected it would rise.

Half of those surveyed thought the government’s fiscal measures were excessive, up from 33 percent in the group’s March survey. Almost eight out of every 10 economists surveyed said a second stimulus bill wasn’t needed.

Less Spending

Three-quarters said they would like to see the government cut spending over the next two years, while only 28 percent projected the reductions would actually take place.

The economists also favored increased regulation of financial markets, including greater oversight of derivatives, requirements on financial institutions to put more of their own funds at stake when securitizing mortgages and reform of the credit-rating companies.

This was the most surprising finding for Chris Varvares, the president of NABE and of Macroeconomic Advisers LLC in St. Louis.

“This tends to be a fairly conservative group, and you can see it except when it comes to regulation,” Varvares said in an interview. “They definitely are into more regulation in financial services.”

To contact the reporter on this story: Carlos Torres in Washington at ctorres2@bloomberg.net