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Is the US Economy Recovering or Overheating?

The fact that core inflation is rising on the back of substantial GDP growth and declining unemployment should not come as a surprise. Those who are wringing their hands about economic "overheating" should remember that an absence of price increases would reflect an economy that is still struggling.

BERKELEY – The financial and economic news in the United States lately has been dominated by concerns about inflation. “Runaway inflation is the biggest risk facing investors, Leuthold’s Jim Paulsen warns,” according to the cable news channel CNBC. As a potential hedge against inflation, “Bitcoin’s time to shine is fast approaching,” reports Fortune’s Robert Hackett. According to US News and World Report, “There is a lot of talk about inflation in 2021 as fears of high government spending creep in and the recent rebound in prices from pandemic-related levels has some investors worried that the trend will continue for some time.”

And yet, one also reads that “US Treasury yields hold ground even as inflation picks up.” After growing at an annualized rate of 33.4% in the third quarter of 2020, 4.3% in the fourth quarter, and 6.4% in the first quarter of this year, the US economy is on track for a full recovery. The second-quarter growth rate is expected to be at least 8%, and perhaps significantly higher, which means that the US economy, in aggregate, will have fully returned to its pre-pandemic production level by the third or fourth quarter of this year.

In this context, it is no surprise that core inflation (which excludes food and energy prices) rose 0.4 percentage points over the past month. That rate implies nearly a 5% annual inflation rate. But looking back over the past 12 months, the core inflation rate (as measured by the consumer price index) was 2.3%, which is in keeping with the US Federal Reserve’s 2-2.5% target.

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