With inflation persistently undershooting the 2% target over the past decade, economists at Capital Economics have long argued that deflation could be only one recession away. But, because of several factors that made this year’s recession unique, it won’t be the one that tips the economy into deflation. Inflation expectations are already building.
“The pandemic has increased the odds that the US will eventually experience a period of high inflation, principally because we expect the Fed to be less committed to ensuring price stability in the future. The higher public debt burden, slower global labour force growth and the possibility that globalisation will be partly reversed, are additional reasons to expect inflation to gradually rise over the longer-term to 3% or 4%. Any deflationary pressure from technology is likely to be muted, while several unique factors linked to the pandemic mean that the risk of a near-term slide into deflation is low.”
“Because the lockdowns triggered declines in both production and spending, with the latter recovering more quickly than the former, inventories are unusually lean for this stage of the economic cycle, which is putting upward pressure on goods prices. In addition, ongoing physical distancing restrictions have increased costs and reduced supply in many services sectors. As a result, we expect headline inflation to average 2.5% next year, before dropping back to 2.2% in 2022. Core inflation should average 2.3% next year and then edge back down to 2.2% in 2022.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.