Are our health worries now replaced by economic worries? Should we fear inflation in a post pandemic world?

Worthless banknotes are collected to be burned during the hyperinflation in the Weimar Republic in 1923. Image source: Rare Historical Photos

Economists often say inflation is as much a psychological phenomenon as it is an economic one, and with over 3 trillion dollars printed throughout the pandemic, confidence has dwindled and fear has risen. On the one hand, some people think not enough stimulus was injected. Certain people in the same camp believe that the aid was poorly distributed, not “trickling” down. Yet, at the other end of the spectrum, people believe that too much money is being printed, risking inflation, with some even screaming of bubbles in capital markets and investing heavily in decentralised currencies. Who is right? In essence, the question is a battle between the deflationary camp and the inflationary camp. But how can such opposing views even be considered in simultaneity?

Economists use a breadth of indicators to forecast the direction of the economy. Two historical indicators, the price of Gold and the S&P 500 Price-Earnings ratio, can help predict the future buying power of the dollar. At the same time, metrics like the Consumer Price Index and the CRB commodity index can counterbalance these observations by providing price data of less speculative assets.

According to the Cambridge dictionary, inflation is an increase in prices over time, causing a reduction in the value of money. In layman terms, inflation increases the price in dollars of bread, while deflation makes bread cheaper.

What can the price of these assets say about inflation?

Let’s look at gold. Compared to March 16, 2020, the price per ounce of gold has grown only 1.4% to the dollar as of March 7, 2021. However, over the course of the year it rose about 30% in August before falling back down. The price was shocked with 5 significant crashes over the course of the year. Historically, the price of gold has shown an inversely correlated relation with the value of the dollar, meaning when one goes up, the other goes down. This tendency can underscore the confidence, or lack thereof, in government backed currencies because when investors fear inflation they seek to invest in a safe heaven or an uncorrelated asset to diversify their risk. While the extreme volatility during the year 2020 suggests a lack of confidence in government-issued money, the return to a pre-COVID (pre money printing) price is reason to believe individuals and firms are keeping faith in the dollar as a store of value as much as they did before the pandemic. According to Alan Garner, a senior economist at the Federal Reserve Bank of Kansas, “an increase in the price of gold might precede an increase in the general inflation rate — provided the expectation of rising inflation was correct in the first place.” Perhaps the price correction is proof the expectation of inflation was unfounded all along.

Contrarily, Bitcoin (BTC), a decentralised cryptocurrency created in 2009, saw an astronomical rise in 2020 and continues to hold. According to the Kraken exchange, Bitcoin rose 440% to the dollar. While at first raising doubts on the confidence of the dollar, it is important to remember the market capitalisation of BTC, i.e. the total value of all bitcoins, as of March 7, is floating around 1 trillion USD. In comparison, the market capitalisation of gold is roughly 10 trillion USD. The significantly smaller market capitalisation, telling of BTC’s growth stage as opposed to the end game stage of gold, puts into perspective the rise and volatility of BTC. Therefore, the question of inflation should always be asked in respect to what. For a store of value can be inflationary to certain commodities but dis-inflationary or deflationary to others.

On the other hand, the S&P 500 Price Earnings (PE) ratio is at a 10 year high, increasing over 60% since January of 2020 to roughly 42. The price-earnings ratio is a metric that gives the price-per-share divided by the earnings-per-share, and can often denote the under or overvaluation of stocks. The current S&P 500 PE ratio evidences inflated stock valuation and, echoing the PE ratio during the “Dotcom” bubble of 2001 which surpassed 45, is indicative of a speculative bubble. This inflated PE ratio gives reasons to doubt the value of money because if returns are more easily made on the stock market, it means the cost of building companies and hiring employees is high. As the father of modern economics, John Maynard Keynes said, “there is no sense in building up a new enterprise at a cost greater than that at which a similar existing enterprise can be purchased.” While not only does the price increase of the S&P 500 indicate a weakening of the dollar, the increase in stock market speculation as opposed to real enterprise further evidences an inflationary current. But could this be a transitory phenomenon as businesses are put on hold and not indicative of long term inflation? In short, yes. With a sharp decrease in consumer demand, the conditions were simply too uncertain for entrepreneurs to set up new businesses. Meanwhile, since consumption dropped, household savings reached all time highs and have been invested, often on the stock market. 2020 in essence was a year for pure speculative investment as real investment froze with business.

Could there be signs of disinflation?

The pandemic’s damage on industries has balanced out the inflation risk caused by the increase in the money supply. According to the FT’s editorial board, “a collapse in demand is reducing prices even as central banks print money… because [it] produces a countervailing force by reducing the demand for the bank credit that makes up the bulk of the money supply.” According to the Office for National Statistics, the Consumer Price Index (CPI) inflation rate is only 0.9%. The CPI measures the change in price of a consumer basket compared to a base year and is regarded as one of the most accurate inflation indicators. However, it’s often critiqued for its slow reaction. Compared to the CRB commodity index, an indicator that tracks a range of commodities from soybean to oil to gold to pork belly, the price of the basket of commodities has gone up 15.30% since the beginning of 2021 and is nearing the pre-pandemic price, according to live data from While a controlled CPI of 0.9% indicates a disinflationary current, the CRB commodity index at a high (but not drastically high) 15.3% increase foresees the price spikes as demand restarts in the near future.

What will price levels post-COVID look like?

With global trade returning to normal levels, according to the Netherlands Bureau for Economic Policy Analysis, we seem on track for a stable recovery. The gold price is far from indicative of hyperinflation on the Weimar Republic scale, or other extreme cases of rapid money devaluation. And even though S&P 500 PE ratios are at a peak, a similar correction to that of the gold price should occur as firms and individuals seek to transition to treasury bills and cash equivalents. As John Maynard Keynes observed, “there is an inducement to spend on a new project what may seem to be an extravagant sum, if it can be floated off on the Stock Exchange at an immediate profit.” Jamie Dimon, JP Morgan CEO, describes it as a Goldilocks moment — “fast growth, inflation that moves up gently (but not too much) and interest rates that rise (but not too much).” Given these indicators, the next year could be one enveloped by liquidity and growth. Although current inflation fears rest assured, looking down the road, one can only be cautiously optimistic. Monetary policy, from lowering interest rates to increasing the money supply, must be realistically looked at as a short term fix to economic turmoil. As the world undertakes historically high levels of debt, with a PwC estimate of public debt of the G7 countries at 140% of the G7 GDP, we must now look to Congress, not the Federal Reserve. For the aim of bringing this percentage down relies on increasing GDP, and that outcome depends on legislation instead of monetary policy, i.e. government investments into research and development, and into education. With these pressures, what has been a year of hardship may actually be succeeded by a period of long term economic growth.

Sources to my article can be found on my Author page, labelled “References”



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