Greg Daco, Oxford Economics chief U.S. economist, joins Yahoo Finance to discuss inflation concerns, outlook on economic recovery and cryptocurrency.

Video Transcript

BRIAN SOZZI: Economic watch is around full force this week as Fed chief Jerome Powell has a second day of testimony in front of lawmakers today, along with Treasury Secretary Janet Yellen. That's in addition to speeches today from Fed governors Barkin, Daly, Williams, and Evans.

Let's bring in Oxford Economics chief US economist Greg Daco for some analysis here. Greg, good to see you as always. We've seen-- or we've heard from Jay Powell yesterday, his continue talking down of a prolonged increase in inflation. Do you think that's the case? Do you think any inflation that we see over the next three to six months is, in fact, transitory?

GREG DACO: Well, I think what is right is that we will see inflation firm over the coming months. It's undeniable that we're going to get three factors pushing up inflation. We're going to get base effects because the comparison to last year is going to be quite favorable. We're going to get a push from energy prices, and we're going to get a push from stronger economic activity under that fiscal impetus from the American Rescue Plan.

So we will see inflation likely reach levels that we haven't seen in the recent past. We're likely to see headline CPI inflation around 3 and 1/2% over the spring, core PCE inflation close to 2 and 1/2%, and that inflation will be, to some extent, sticky through the rest of 2021. But I don't expect spiraling inflation. So in that light, in line with Powell's view and the Fed's general view that we won't see persistently higher inflation and inflation spiraling out of control.

BRIAN SOZZI: Where are you-- Greg, where are you most concerned that inflation may increase at a faster pace than some of those increases you just mentioned?

GREG DACO: Well, it all depends on the rotation of the US economy. We have seen a very strong demand for goods. And reflective of that, we saw very strong price increases in the sectors that were in high demand. As we see a rotation towards more service sector spending, we're going to see some increased price pressures on those fronts.

But overall, that price pressure should be fairly gradual and not something that spirals out of control because there are natural checks in a way in terms of inflation dynamics. And in particular, I would note the fact that demand tends to be endogenous. So in a sense, if prices rise too much, that will put a curb on demand and in itself limit the upside to inflation.

One key factor that we have to keep in mind when we look at the inflation trends is inflation expectations. Those seem relatively well anchored despite the rise in goods prices. And we should see those continue to remain anchored going forward, and that will be the key anchor that prevents spiraling inflation.

JULIE HYMAN: Greg, some of the places that we have seen inflation thus far have been in places that the Fed doesn't count, right? Things like energy and food. Forget about the rates perspective for a moment, but from an economic perspective, what tends to happen when we see increases in food and energy prices? Is there then a pullback on spending on those items? Is there a pullback in spending on other areas? What tends to happen?

GREG DACO: Well, I think the reason why the Fed tends to be a little bit cautious with its perception of how food and energy prices evolve is because those tend to be quite volatile. So we know, for instance, that energy prices tend to have big swings on the upside and big swings on the downside. In order to avoid changing policy to these types of swings, the Fed prefers to look at a core measure of inflation.

That being said, higher energy prices, higher food prices do have an effect on the average household, and in particular, on the lower income households. And the Fed is very much concerned about the impact of the dynamics, more to say, in terms of the spending patterns for these lower income families. So it is still watchful of the trends in terms of food prices, in terms of energy prices, because in some cases, those are essentials that you cannot go without. And therefore, they do tend to affect how you spend on other categories of goods. Not necessarily food and energy, but other types of discretionary spending, and that would be also something to monitor closely going forward.

JULIE HYMAN: Yeah, definitely. Greg, you've also been monitoring the trend of coronavirus globally very closely as it relates, of course, to the economy. Particularly in Europe, where we're seeing new shutdowns, it seems to be having a negative effect. What about here in the US? I mean, we're still seeing high case counts, but it doesn't seem to be-- you know, especially as more people get vaccinated, it doesn't seem to be having a negative effect.

GREG DACO: Well, we're in this race between the vaccines and this spread of the new variants across the US. We've seen a number of places see a plateauing of the number of new cases. And that is something to be watchful of. But it's very encouraging that at the same time, we're seeing a steady rise in the number of daily vaccinations. We're currently trending around 2 and 1/2 million doses per day. And we're seeing the rates of vaccination really rise rapidly.

We anticipate that by the end of April, we'll have vaccinated, or at least-- sorry-- given a first dose to half of the population over 15 years old in the US, which is a steady improvement over the past few months and more than we had expected initially. So this improvement in the health situation will no doubt be supportive of economic activity. But there will be bumps along the road. I don't think we should expect a smooth recovery.

It will be a bumpy one. We will see months where data is weaker. We will see months like in March where data is very strong, with the help of fiscal stimulus and with improving health conditions.

BRIAN SOZZI: Greg, hard right turn here. I was watching your Twitter feed, and I believe you tweeted something on digital currency. And Fed chief Jerome Powell, he played that down. He doesn't seem inclined to push forward with a digital dollar. Do you think a digital dollar-- it's just inevitable and it's something that's going to happen in the next decade because it is more efficient.

GREG DACO: I think it will happen. The question is when and how. I was hearing the conversation you were having earlier around Bitcoin. The key issues with cryptocurrencies is that they're used as storage of wealth is not the best because the value of that Bitcoin tends to change quite a bit. And furthermore, in terms of transactions, you don't know who's going to accept that currency.

Whereas if you have a central bank digital currency, that would tend to be accepted by all and would be something that would perhaps be actually increase the efficiency of fiscal stimulus, for instance, something that Julia Coronado has highlighted in the past in terms of helping stimulate the economy more rapidly via this-- the central bank digital currency.

So I think it will be something of the future. But the Fed and Fed chair Powell are very careful about the development. And they know that the dollar has this Reserve currency status. So they want to preserve that and make sure that any development of such a digital currency would be backed by significant research and well-prepared, instead of launching it too early and risking any negative influence on the value of the dollar.

BRIAN SOZZI: All right, so maybe within the next 25 years. All right, we'll leave it there. Greg Daco, Oxford Economics chief US economist, always good to see you.

GREG DACO: Thank you.