If consumers manage to recover quickly and healthily, thanks in part to so much public money being put in their hands, supply may fall short and inflation could come back.
As the economy gradually reopens, the trauma from the pandemic is more obvious than ever. The recession will be extraordinary in the first half of the year, but how will activity readjust over time? If consumers manage to recover quickly and healthily, thanks in part to so much public money being put in their hands, supply may fall short and inflation could come back. If demand is restrained, low rates of inflation may settle. Looking past that, what is the outlook for inflation beyond the next 12 months? Understanding how inflation looks on the horizon matters for taking informed decisions, including where to save and invest.
This report investigates the forces fundamental to demand and supply at the end of this pandemic and reaches unfortunate conclusions: we don’t see either structural or cyclical forces that trigger an acceleration of inflation, either now or in the next several years. There is a scenario in which runaway fiscal spending will create an environment that fosters inflation, but the odds look very low. The risk is rather that governments stop their policy support too early, either because of a debt-fearing mindset or because markets force them to.