CRS INSIGHT
Prepared for Members and
Committees of Congress
Is High Inflation a Risk in 2021?
April 6, 2021
Assuming public health continues to improve, many economists project rapid economic growth in 2021.
The unprecedented fiscal and monetary stimulus in response to the COVID-19 pandemic is also expected
to continue in 2021. Some observers have questioned whether the combination of stimulus and rapid
growth will result in rising prices.
Historical Trends in Inflation
The economy experienced persistently high inflation in the 1970s and early 1980s, last reaching double-
digits in 1981 (see Figure 1). Most economists believe this high inflation was caused by overly
expansionary monetary and fiscal policies, along with significant increases in energy prices. Additionally,
as expectations of higher inflation became incorporated into consumer and business decisions, these
expectations contributed to actual increases in inflation. The Federal Reserve (Fed) raised short-term
interest rates significantly in the early 1980s, which successfully brought inflation down quickly, though
at the cost of a recession.
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The Fed kept short-term interest rates near zero from late 2008 to late 2015 and again in 2020 in response
to the pandemic. The Fed has also made large-scale asset purchases (popularly called “quantitative
easing”) during both periods, resulting in historically rapid growth in the money supply. At the same time,
federal budget deficits have been larger as a share of GDP from FY2009 to FY2012 and in FY2020 than
at any time since World War II (see Figure 3).
Figure 3. Federal Budget Balance as a Share of GDP
FY1946-FY2020
Source: Source: Office of Management and Budget.
The recent period of low inflation despite simulative fiscal and monetary policies is likely due, in part, to
the 2007-2009 Great Recession and the COVID-19-induced recession—the two deepest recessions since
the Great Depression. In both downturns, rapidly falling output and rising unemployment made a rise in
inflation unlikely. Although historically large, fiscal and monetary stimulus were unable to fully offset
these economic shocks. Even when unemployment became low in the years preceding the pandemic,
inflation was contained, and inflationary expectations remained stable. Globalization, technological
innovation, demographics, and various other factors have been offered as additional forces countering
inflationary pressures.
2021 Outlook
Many observers expect a combination of rapid economic growth and the continuation of highly
expansionary monetary and fiscal support in 2021, raising concerns over the potential for higher inflation.
For example, the Fed has pledged to keep short-term interest rates at zero until the economy reaches full
employment and inflation is modestly above 2%—which Fed leadership does not expect until 2023 at the
earliest. On the fiscal side, the budget deficit is projected to be around 15% of GDP in FY2021 following
the enactment of the American Rescue Plan Act of 2021 (. 117-2).
Some economists believe that . 117-2 is too large relative to the output gap and will result in the
economy overheating, with the potential for a significant increase in inflation. The output gap is the
difference in actual output and potential output (., what the economy is capable of producing when it is
at full employment). Even though the output gap is currently large, and therefore inflationary pressures
are low, rapid growth and too much fiscal and monetary stimulus could cause actual output to overshoot
2021-04-06T07:39:55-0400
