TL/DR: Despite massive fiscal stimulus packages and seemingly never-ending quantitative easing programs, I don’t believe we’re headed towards a world of out-of-control inflation. Why? The prospect of permanent economic scarring in certain sectors due to extended lockdowns coupled with rapid technological adoption are two factors that are likely to keep price pressures low.
Investors seem quite concerned about rising inflation risk, which is likely supporting the strong bid for inflation-hedging assets like gold and bitcoin year to date. Adding fuel to the fire, top money managers, like Bridgewater and BlackRock, have been vocal in financial media lately about the risk of a high-inflation regime down the road. A high-inflation regime would be a remarkable departure from the past decade, where inflation was relatively tame even despite ultra-low interest rates and the introduction of unconventional monetary policy tools, like quantitative easing (see chart here: ibb.co/Dt8nVFC).
Similar to what was observed over the past cycle, I don’t see recent policy action leading to sky-high inflation in the future.
- First, it’s important to note that fiscal and monetary stimulus is a response to a weak economic outlook. Direct income assistance (i.e. the CARES Act) is meant to help offset lost wages due to extended lockdowns and business closures. Those who believe inflation is going to materially rise would argue that the government built a “bridge too far” – though so far the pandemic has outlasted the duration of U.S. stimulus measures.
- Second, the pandemic has supercharged the digital economy. E-commerce is exploding (see chart here: ibb.co/7GQknX6) – a long-term trend that I believe is likely here to stay. It is well studied that e-commerce is a deflationary force (read more here: www.nber.org/papers/w24649). The intuition is straightforward – the internet increases price transparency, lowers barriers to entry, fuels competition, and increases aggregate supply. More online shopping is likely to keep goods price inflation in check for now. This goes without mentioning innovations in the services sector, such as telehealth and online education, which could also keep inflation at bay.
Lastly, as a professional investor focused on global macro, predicting where the global economy is headed is hard and an incredibly humbling exercise. I prefer preparing my own portfolio for a range of outcomes – so while I personally hold some gold and bitcoin, I wouldn’t bet the farm on a resurgence of inflation in the future.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.