Much of the recent discussion on whether the proposed $1.9trn fiscal stimulus, equivalent to nearly 9% of GDP, could be too big when the output gap is closer to 3%, has glossed over the fact that the remaining shortfall in output is concentrated in the sectors most affected by the containment measures put in place to tackle the pandemic. The problem is deficient supply rather than demand. Once widespread vaccinations allow those restrictions to be lifted, however, this massive fiscal stimulus, which comes at a time when the Fed is resolute in its opposition to tightening monetary policy until it has achieved a “broad and inclusive” labour market recovery, will add to the lengthening list of factors that point to inflation surprising on the upside.
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