In 2008, the International Monetary Fund (IMF), along with the U.S. economic academic community, failed to anticipate the Great Recession. Today, as the Biden administration engages in the country’s largest peacetime budget stimulus on record, and as the Federal Reserve continues to inflate a global “everything” asset and credit market bubble, the IMF risks repeating its 2008 error. By so doing, it is failing to fulfill its mandate of promoting global economic prosperity.
One basic error that the IMF is making is to parrot the Federal Reserve’s mantra that current inflationary pressures are largely the result of transitory supply-side factors. To be sure, the IMF anticipates that by the end of this year, core price inflation, as measured by the personal consumption expenditure deflator, will rise to 4 percent, or double the Fed’s 2 percent inflation target. But it assumes that by the end of 2022, inflation will have retreated to 2.5 percent.
In adopting its Panglossian inflation view, it does not seem to bother the IMF that this year the U.S. economy is receiving a budget stimulus equivalent of around 13 percent of GDP at a time when the Congressional Budget Office estimates that the country has only a 3 percent output gap. One would have thought that with such a high degree of government largesse, the IMF should be sounding the alarm about imminent demand-side inflation risks.