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.

That somewhere will certainly be higher prices. Companies need to purchase raw materials or pay workers. Those record-high piles of cash mean they can afford to pay more to get what they need. That is inflation: Paying more for the same thing. Individuals who are also sitting on record-high piles of cash are also able to afford to pay for the increased prices companies are passing on. That, too, fuels inflation.

In theory, this will signal producers to add capacity to reflect increased demand. But those producers are loath to do so, rightly worrying that the increased prices don’t signal a desire for more goods but rather a surplus of money enabling people to pay more for the same goods. They don’t want to be left holding the bag for expensive new plants to produce more metal or lumber, only to find there’s no demand for the added capacity.

Policymakers cannot go back in time and reverse the unnecessarily generous stimulus packages they initiated last year. Both, however, can stop adding fuel to the fire.

For Biden, that means pulling back on his massive economic spending plans. His American Jobs Plan alone would hike federal spending by an estimated $2 trillion over the next decade. Combined with his American Families Plan and other spending increases contained in his recent budget, federal sustained spending would rise to the highest level since World War II. That would effectively make permanent much of the temporary pandemic-related boost in spending enacted last year. This can only add to future inflationary pressures.

For the Fed, that means moving away from its stance that interest rates will remain near zero for the foreseeable future. This month’s inflation level exceeded the Fed’s expectations, a sign that its read on the economy is likely wrong. The Fed now has two choices: It can sit tight on its current policy for a few months, and see if inflation continues to rise above its forecast, or it can revise its forecast to reflect the new, higher inflation expectations. If it does the former, it risks stoking inflation by playing down fears, which will inevitably lead it to take stronger measures later. If it revises forecasts now and indicates that it could raise interest rates sooner than expected — perhaps as early as this winter — it has a chance of persuading businesses to keep some of that cash on the sidelines in expectation of larger returns later.

Inflation is like a hurricane that gathers strength offshore until it makes economic landfall with devastating effect. Economists are like weather forecasters who tell us how strong the storm is and where it will go. Right now, our forecasters are drastically underestimating the possibility of an economic Category 5 tempest hitting U.S. shores. The political and economic consequences of such a massive misreading could be catastrophic.

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