- Underlying pressures are likely to keep
inflation higher for longer, according to former Fed ChairAlan Greenspan . - While the rising demand for goods and services has caused prices to spike, it should subside over time, he said.
Inflation looks likely to remain higher for longer due to underlying pressures, according to former Federal Reserve Chair Alan Greenspan.
While the rising demand for goods and services has caused prices to spike, it should subside over time, he said in a note published by Advisors Capital Management on Monday.
Instead, "there are other forces at play" that may create a more inflationary environment in the near future, he warned.
"Monetizing the debt cannot be a long-term solution, and increases in the money supply relative to the real goods and services an economy produces will eventually lead to higher price levels," wrote Greenspan, who is now a senior economic adviser to Advisors.
Even before the pandemic, the former Fed chief said the US debt has steadily outpaced the country's GDP, lifting the debt-to-GDP ratio. But because of the devastating economic effects of COVID-19, the US has had to respond with the most expensive economic relief effort in modern history, he said.
Meanwhile, supply-side inflationary pressures from the spike in energy prices to wide-ranging commodities shortages are adding to demand-side pressures, Greenspan added.
"The tendency toward inflation remains, unfortunately, well above the average of about 2% over the past two decades," he said in the note, overshooting the Fed's target.
For now, yields on the 10-year Treasury notes remaining below the levels they were pre-pandemic levels, he pointed out, suggesting that the financial market may trust in the Fed's ability to guide the country towards economic recovery.
The Federal Reserve Open Market Committee is expected to announce at its meeting next month that tapering of asset purchases will begin, though rate hikes are not seen until next year.