A closer look at the debate about inflation after the pandemic
Up, up and away?
Just a year a go, it seemed like the topic of inflation was all but dead. Now, the debate is back on the table: In the wake of the coronavirus pandemic, could inflation make a comeback that is more than just a flash in the pan? An analysis by Union Investment shows which factors will be key and what the medium and long-term inflation trend might look like.
A highly respected financial expert wrote in 2012 that, in the long run, inflation is as much of a certainty as death and taxes. And – in the wake of the financial crisis and amid the European sovereign debt crisis – he was not alone with this opinion. Many market analysts and economists shared the view that it would only be a matter of time before inflation shot up.
In reality, inflation has kept us waiting in recent years with rates remaining at low levels. And until about a year ago, you could have been forgiven for thinking that the issue had all but gone away. Rather than leading to rising inflation, as some had feared, the central banks’ expansionary monetary policy just about prevented prices from tipping over into deflation. In the eurozone at least, inflation was stuck at a low level of less than 2 per cent. The hypothesis that structural reasons had to be responsible for this persistently low level of inflation originally emerged and became popular in the US, but subsequently also gained traction in Europe. Had inflation lost its sting?
Skip to the present: The coronavirus pandemic still has a firm grip on social and economic life. The virus is unexpectedly calling long-established, seemingly certain beliefs into question. Infection levels, the proportion of severe cases and the rate of vaccination have suddenly become factors that shape economic forecasting. And that is not all. The pandemic has a disruptive effect, or at least it is widely perceived in this way. In respect of some trends, such as digitalisation, it is acting as a catalyst. The focus is not merely on more computers and robots, but on a comprehensive digital transformation of production processes. However, at the same time, coronavirus could result in a lasting contraction of production capacity in certain other industries, because demand might never fully recover after the pandemic due to changes in behaviour.
In any case, the crisis has certainly led to substantial increases in debt-funded public spending and the supply of money. During the crisis, governments adopted large-scale financial aid programmes to support their economy and citizens, while the central banks simultaneously intensified their ultra-expansionary monetary policy approach. This has triggered a debate both among experts and in public: Might inflation make a comeback in the wake of the coronavirus pandemic?
Our research paper summarises the findings of an analysis conducted by Union Investment that examines the current debate about inflation in a wider context and, most importantly, with a greater focus on the medium and long term. The aim is to look beyond purely short-term-oriented forecasts and inflation warnings and to see the bigger picture.