- Pandemic cash will pump up prices, says the monetarist camp
- Skeptics point to scarce jobs, idle plants, cautious consumers
There’s hardly any question that carries greater weight in economics right now, or divides the financial world more sharply, than whether inflation is on the way back.
One camp is convinced that 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. The other one says the virus is exacerbating the conditions of the past dozen years or so — when deflation, rather than overheating, has been the big threat.
The debate touches every area of policy, from trade rivalries to unemployment benefits, and everyone has an interest in the outcome.
Governments and central banks may face pressure to curtail their pandemic relief efforts, already worth some $20 trillion according to Bank of America, if they trigger a spike in prices. Workers and consumers will see the impact in wage packets and household bills. More than $40 trillion of retirement savings is at risk of erosion if inflation returns.
Inside the economics profession, there’s something else at stake too. Charles Goodhart –- a scholar at the London School of Economics who, at the age of 83, has seen a few orthodoxies rise and fall –- argued in a recent paper that what happens to inflation after the pandemic “will affect macroeconomic theory and teaching, perhaps forever.”
For now the jury is out. Some countries reported a drop in prices early in the crisis, and a jump more recently. In the bond markets and among consumers, measures of expected inflation have edged higher. But the data that will ultimately settle the question could take years to trickle in.