What are there reasons to fear US inflation after the pandemic ends?
The rise in prices is good, as it encourages people to spend today and not postpone until tomorrow. But too rapid rise in prices leads to increased uncertainty and lower real incomes: and this is already bad.
When it comes to post-pandemic US inflation, some experts believe it will to go wild. What does this threaten (if, of course, this can happen at all)? If inflation rises well above the target, the Fed will start raising rates to contain the rise in prices.
Behind this rate, bond rates will rise and prices in the financial market will fall: As many fear that assets in the financial market are overvalued, this could lead to a serious collapse in asset prices.
Let's see how well-grounded the fears about US inflation is: In order to do this, let's see what happens to the currency in circulation in the United States.
(This because it is with its help that purchases are made and generate the increase in prices)
Blue line - annual growth of currency in circulation,% (yoy) (left axis).
Red line - US CPI inflation,% (yoy) (right axis).
Let's look at the 2008 crisis (gray area): Back then the Fed turned on the printing press and increased its assets by 2.5 times (by $ 1.1 trillion). Accordingly, the currency in circulation (blue line), which is being used for purchases, has grown by more than 10% (YoY).
Along with the growth of the currency in circulation in the second half of 2009, inflation also tightened: it grew from -2% to 2.8%.
Now let's look at the yellow area - the current coronavirus crisis: The Fed has increased its assets 1.75 times (by $ 3.1 trillion). As a result, the currency in circulation (blue line) grew more than before - more than + 15% (yoy).
Inflation during the 2008 crisis was negative before the recovery, and today it is about 1.2%. Judging by the experience of 2008-2009, after the growth of the currency in circulation and the beginning of an active economic recovery, inflation jumped by almost 5 percentage points.
What we see today: The currency in circulation has already risen, but the United States has not yet moved to the stage of active recovery from the coronavirus. If we assume that vaccinations will help the economy to the fullest, then there will be a strong recovery ahead. The structure of this crisis suggests that the American economy is capable of recovering at a rapid pace once COVID-19 is defeated.
Therefore, it cannot be ruled out that inflation may still show a significant increase: nobody talks about extremes like hyperinflation and the collapse of the American economy. But the acceleration of inflation in the US above 4% is quite capable of making the regulator and the markets quite agitated.
London, 10 December 2020
OTB Global Investment