Written by Alex Beveridge

Immense government budget deficits. Low interest rates and remarkably accommodating monetary policy. Sounds like a surefire setting for inflation. Or maybe not....

The COVID pandemic set off a global economic downturn that prompted unprecedented economic stimulus packages from government and central banks. But, this has created a setting that textbook economic theory says inevitably has to lead to a substantial uptick in inflation. 

Yet, many insist the underlying conditions are not, in fact, laying the groundwork for inflation. Because of the COVID slowdown, there is substantial underutilised capacity in the global economy and large numbers of unemployed workers. 

Economic expansion would simply engage these idle resources, without necessarily driving up prices. Moreover, the textbooks haven’t fully recognised two important changes in national economies: Globalisation means if unemployment drops in the industrial countries, there is still a vast pool of labour elsewhere that can be tapped without raising domestic labour costs.  

And the digital world means greater efficiency in the use of resources - there may be a shortage of welding equipment but there’s an endless supply of cheap terabytes. In any case, the increasingly influential advocates of Modern Monetary Theory say governments can print money with few ill effects.

All this may be true in the short run, inflation hawks reply but budget deficits and quantitative easing tend to become addictive for many regimes. And cynics add that some government may welcome inflation because they can pay down their massive debts with ever cheaper money. 

Those who question the “this time it’s different” argument say the markers for inflation are being laid down in countries around the world. As soon as much of the world is vaccinated, and the COVID hurdles are thrown off, prices will begin to rise sharply.    

Finding the right answers will be crucial to investors, as everything in corporate and government balance sheets is altered by steep changes in prices.   And if inflation leads to higher interest rates, that will lure investors to bonds and undercut the demand for equities.

Who’s right? 

This issue will be debated at Institutional Investor’s European Pensions Symposium & European Investment Roundtable. 

This event, which will bring together major European investors with leading investment managers and other investment experts, will be held 29 September - 1 October 2021 in Copenhagen, Denmark   

Expect a fierce debate on the inflation question: When, where, and how much? Or why not?

Interested in attending? Register your interest here.

See a full list of our live events happening in September here.