Is the fear of inflation real or is it only a horror story?
One hears a lot of gloomy speculation these days that inflation is going to hit us soon. Since central banks have literally flooded our economies with money in reaction to the outbreak of the pandemic, this common fear seems only too comprehensible: According to what most of us have learned in school, you cannot simply print money without having to pay the price in the form of higher inflation at the end of the day. But is it really that simple? There are arguments to both disquiet and sooth the concerned mind.
Yes, inflation is going to get us soon:
This accommodating monetary policy is unprecedented and therefore has to lead to inflationary pressure. This is an argument which has been brought forward mostly by monetarists who argue that inflation mainly depends on the amount of money circulating in our economy. According to this thinking, if the offer of products remains the same but the amount of money increases, prices necessarily have to surge.
Demographic change. Babyboomers are soon going to retire and will start to spend heavily what they have saved over a lifetime. This will further boost demand and lead to more dollars chasing the same amount of products (i.e. inflation). In addition, a diminishing work force will drive wages up since employers are forced to pay more to get one of the increasingly rare young people on board. If higher salary translates into higher prices, this means inflation, too.
Deglobalization. The establishment of new trade barriers or at least more scepticism when it comes to new free trade agreements will drive prices upwards. What is more, demographics also take their toll on countries which hitherto have provided the world with an abundance of cheap labor. China’s one child policy has turned it into an aging society (see demographic change above).
Inflation is already there, it is simply not measured. Some economists argue that soaring real estate and stock markets already show strong signs of inflation since they seem increasingly decoupled from real demand and underlying economic developments. It feels indeed odd to be in the hurricane’s eye of a devastating economic crises and nevertheless watch equity prices climb to new record highs. When we measure inflation, though, these prices are not taken into account, which could somehow distort our perception.
No, inflation is a fairy tale:
Technology. The technological revolution will put more pressure on employees than ever before and will make them easy prey for stagnating salaries. It seems only logical: When you have to fear that you might soon be replaced by a robot, you will feel less entitled to ask your boss to give you a raise. This effect could already be observed in the past, only that the sword of Damocles then was outsourcing parts of a company to cheap labor countries.
Globalization. Even if current political developments and the pandemic seem to put a halt to further globalization, one must not forget that integration and interconnectedness in our global economy are advanced to a degree that one could hardly fathom that it could ever be disentangled again. And even if many politicians these days claim to make their countries great again by bringing production back within their borders: When it comes to keeping TVs and smartphones easily affordable for the broader public, even protectionist hawks will turn into doves.
With all those arguments swirling around, it would appear insincere to make any prediction at this point on where we are heading. Much will depend on how fast economic recovery gets traction after the pandemic is under control and how central banks will set their monetary policy in reaction to that. One thing is for sure though: No matter if inflation will go up or remain weak, one of the arguments listed above will be used to explain it.
