Coronavirus Watch: Why inflation fears are misplaced

The recent sharper-than-expected pickup in core measures of inflation in some advanced economies has led to renewed fears that higher inflation may be on the way. However, we’re sceptical.

Core inflation has risen over the last couple of months, but it generally remains a fair bit lower than at the start of the year. A myriad of factors has led to a more erratic than normal path for CPI inflation, so the apparent recent upward trend should be treated with some caution.

Strong money growth could be a sign that the increase in core inflation is more than noise. But we think the surge is due to exceptional factors rather than because too much money is chasing too few goods and services.

Similarly, fears that QE will eventually prove more inflationary than a decade ago by triggering sustained and large fiscal loosening isn’t borne out by governments’ own fiscal plans. Such an outcome would also require central banks to prioritise governments’ objectives over their own inflation targeting goals. Such an outcome is possible, but not inevitable.

Topics: Coronavirus