In the saga about fate of inflation there are those who bet that it will go up and those who think it will go down.
The former indicate three push factors on the rise in prices. The increase in the money supply, due to the flood of liquidity that the central banks have introduced and will introduce into the economic systems. The scarcity of supply, due to barriers to production and international trade. The necessity of burn off debts that are accumulating, public and private.
All true factors. But is that enough to say that there will be more inflation? Not necessarily. Let's go through them one by one.
The money supply created serves to cover gaps in private and public sector revenues. But this coverage is not necessarily spent. It can be hoarded by private individuals, waiting to understand what will happen. If the demand for liquidity increases not for transactional reasons but for fear of the future, providing it is a bit like pouring water into the desert. And even after the pandemic there will be more reserve than cash in the allocation of savings. Which, moreover, distracts capital from the production circuit.
Furthermore, this increased liquidity is debt, and when the economy restarts, households and businesses will tend to reduce this debt by saving more. Thus they will subtract income generated by production from demand. With a deflationary effect.
So we come to the need for one inflationary flare that burn debts, especially public ones. This has often happened in history. A form of hidden assets. Only in the 800s, when the majority in parliaments was in the hands of holders of public debts, was the painful recipe of deflation resorted to, keeping real rates very high, and large budget surpluses. But today neither inflation nor deflation-with-austerity are needed. Just keep the public debts in the belly of the central banks: a form of consolidation, with the higher interest expense returning to public budgets via dividends from the central banks themselves.
And what about scarcity of some goods? There is, indeed. But the increase of some prices is not inflation, but a change in relative prices. This means that, temporarily, the incomes of some will fare better than the incomes of others.
Finally, there are two factors that are overlooked by those who believe that inflation will return.
Prime. There is excess production capacity. Unemployment too it is a measure of that excess. And it pushes down the price of labour, which is the main cost in all production, and hence inflation.
We are looking at exactly that. In all countries, the price component of the PMI indices speaks of a reduction in wage costs (even with layoffs, not just temporary) and list cuts. To attract demand. In the markets of raw material yet the effect of the abundance of supply is quite clear, with the Petroleum which even recorded negative prices (they paid you to take it).
According to. There is more competition, not only because excess capacity is looking for buyers, but also because with the diffusion of online shopping, which accelerated in the Great Shutdown, prices tend to fall to the values of the most efficient producers (i.e. of the entire supply chain, including distribution). Network transparency it's a great level, the Prince de Curtis would have said.
