“The output of all the scenarios we looked at suggest that risks are toward core inflation running higher than its pre-pandemic level of 2%, but that runaway inflation is not in the cards,” said Maximilian Wieland, a Vanguard investment strategist and co-author of the research paper.
In our baseline scenario, shown in Figure 2, we assume an additional $500 billion in fiscal stimulus and an increase of 20 basis points (bps) in inflation expectations. (A basis point is one-hundredth of a percentage point.) Our model suggests that would push core CPI to a year-over-year rate of 2.9% by the end of 2021. Continued stimulus and moderately greater inflation expectations would further push inflation—offset by stronger base effects (year-over-year comparisons with higher 2021 prices)—to 2.6% by year-end 2022.
In our downside scenario, we envision no additional stimulus and a minimal rise in inflation expectations; in our upside scenario, we bump up our estimate for additional fiscal stimulus to about $1.5 trillion and for inflation expectations by 25 bps; and our “Go Big” scenario factors in substantial net additional fiscal stimulus (about $3 trillion spent over a year) and a marked jump (about 50 bps) in inflation expectations.
In all our scenarios, the second and third quarters of 2022 suggest some weakness from baseline effects. But none of the scenarios results in the kind of runaway, 1970s-style inflation that some fear.