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nflation has risen recently in Europe. Increasing from 2.1% to 2.5% in the last month, its at its highest level for nearly three years. Is the economy running into trouble or is it starting to grow again? Evidence is mounting that the recovery is strong. The result should be a significant reopening of businesses and a potential boom. However, public debt is at record levels and low interest rates may rise. The pandemic-induced demand shock and the lockdown-induced supply shock are temporary, but the re-opening of the economy raises concerns that long dormant inflation will soon resurface. Once the pandemic has ended, households will travel, go to concerts and eat in restaurants, and companies will supply goods and services again. Will there be inflation or deflation in the post-Covid-19 world? Business investment plunged in early 2020, causing a sudden shutdown of most sectors of the economy, including travel, food and accommodation, and the economy is still recovering. Will the surge in government spending, combined with higher growth and lower unemployment lead to inflation? Much may depend on coronavirus
in Europe and whether a new wave arrives, since this could potentially choke off the recovery and keep inflation under wraps. In the UK alone, two million people have registered for benefits, a figure we will see across Europe. Experts point to employment eventually recovering to its previous levels once the pandemic has passed, but a virtual economy may well be cheaper and less labour-intensive than the old, traditional economy. As new business models are adopted, old jobs are destroyed. Labour markets will be divided between those workers who have reskilled for the jobs that have been created by the pandemic, and those who are not. As economies recover, people will get back to work but the very gradual lifting of the lockdown means the recovery will gradual too, so inflationary pressures may remain subdued. Uncertainties are likely to remain raised, which will discourage investment, but demand is collapsing because of the lockdowns, causing prices to come down rather than go up. The argument for inflation: Having seen prices climb higher, workers demand higher wages which causes an increase in both wages and then
prices. Debt and quantitative easing on the economy will inject money into the marketplace and stimulate spending. Another reason for potential inflation is lower interest rates. Money is affordable to borrow, typically leading to more of it making its way into the economy. As unemployment begins to fall and consumer confidence recovers, this stifled demand should boost spending and feed into higher inflation. The no-expense-spared fight against Covid-19 has put developed economies on course for rising prices on a scale they haven’t seen in decades. When an economy is shut down and reopened, supply will not be ready to meet demand. We shouldn’t be surprised to see a spike in prices. The argument for deflation: While prices are certainly accelerating faster than expected, the pressure will soon subside. Unemployment may lower consumer demand for goods and services because people can’t afford them. There may also be an unwillingness to return to normal until there’s more data supporting the vaccine’s effectiveness. The virus is aggravating the conditions of the past decade—when deflation, rather than overheating, has been the big threat. Inflation was low before the pandemic and this will not change once life returns to normal. Experts on both sides of the Atlantic say that these price rises are a temporary consequence of the whiplash effect of the COVID-19 pandemic on demand. Supply chains have been disturbed by demand first collapsing and then surging back, making prices very volatile. On this basis, inflation will settle down once the pandemic abates. Conditions like economic and financial crises, wars, increasing geopolitical risks and pandemics directly affect investor choices, and thus the market. And while global growth is fast returning, a quick and sustained recovery may well be accompanied by a pick-up of inflation. europeanbusinessmagazine.com 65
