The Road to Inflation in Post-covid Times

By Christopher Dembik, Head of Macro Analysis at Saxo Bank 

 
United Arab Emirates, August 19, 2020:   No theme is more important in the macroeconomic space than inflation right now. All the clients we are talking to share their worries about inflation risk and are looking for investment strategies to hedge against inflation. In recent weeks, we have seen a series of upside surprises in inflation data, that mostly reflect the big imbalances in the economy following the COVID recession and some data noise. However, we cannot rule out that we will experience in the recovery phase a prolonged period of high inflation due to a sudden change in regime shift characterized by rising protectionism and more redistributive policies to fight against inequalities. If I could give only one piece of advice to investors, read everything you can about inflation and especially stagflation.
 
There is a large consensus among economists that the initial COVID-19 shock is a massive disinflationary impulse. However, there is no consensus regarding what may come next, let’s say in two or three years. Some argue that the massive surge in money supply will continue to inflate asset bubbles in real estate and in the stock market, as it has been the case since the GFC, but will have little impact on the real economy as a whole due to the persistent decline of both the money multiplier (the amount of money that banks generate with each dollar of reserves) and money velocity (the rate at which money is exchanged in the economy). Others fear that in the long run the boom in money supply combined with a regime shift characterized by rising protectionism and more redistributive policies to fight against inequalities will create lasting inflationary pressures and push inflation above the 2% threshold on a sustainable basis. This view is reinforced by the fact that inflation has always been responsive to sudden regime shifts in the past.