Research & Investment Strategy

COVID-19 update: A disinflationary shock - Part 2

Longer-term inflation drivers: Government debt financing and institutional change

  • We forecast inflation to fall to around 0.5% in the main developed economies in 2020, before rising modestly in 2021. We see inflation below targets in 2022
  • Most concerns for rising inflation reflect government borrowing. There is little evidence that greater indebtedness per se lifts inflation. Greater spending could boost inflation over time, but we judge spending commitments so far as insufficient to achieve that end
  • Central bank balance sheet expansion aims to lift inflation. We are not persuaded by monetarist arguments that fast money growth will see inflation surge
  • The long-term allows for institutional changes. We consider the prospect of changing central bank inflation targets, increased protectionism and green inflation
  • We do not rule out the prospect of inflation rising over the longer-term. Indeed, we anchor our long-term inflation forecasts around central bank targets. But we see the immediate pandemic impact as likely disinflationary through 2022.


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