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Olivier Blanchard How high might inflation rise in the US in the coming years? Blanchard (2021) and Summers (2021) caution that the recent $1.9 trillion American Rescue Plan Act (ARPA), together with the fiscal expansion passed in 2020, may push unemployment low enough to cause overheating and surging inflation. Others, such as Gopinath (2021), see a persistent surge in price pressures as unlikely, and Powell (2021) argues that the rise in inflation will be “neither particularly large nor persistent”. The purpose of this column is two-fold. First, to re-assess how strongly US inflation responds to the unemployment rate, including since the start of the COVID-19 crisis, with a focus on underlying (core) inflation. Second, to predict how high inflation might rise depending on how low unemployment falls with the government spending expansion.

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