Looking ahead, there are some reasons to expect demand to cool, but these will need to be weighed in the balance. Fiscal support is indeed winding down everywhere. Interest rates are starting to rise in the US and the United Kingdom, and will increase later this year in Europe as well. And equity markets have recently fallen back sharply.
But households still have substantial excess savings, and the overall stance of monetary policy remains accommodative, suggesting that demand will continue to be strong. Moreover, with Russia’s war in Ukraine, there is now a genuinely large supply shock boosting inflation in the form of higher oil and gas prices (especially in Europe). Combine that with the increase in short-run inflationary expectations, and we should expect high inflation to stay with us for some time.
Jason Furman, a former chair of President Barack Obama’s Council of Economic Advisers, is professor of the practice of economic policy at Harvard University’s John F. Kennedy School of Government and senior fellow at the Peterson Institute for International Economics.