Only after economies and job markets have healed from the effects of the pandemic will a sustained rise in inflation become a risk
have central banks created so much money in so little time. In the past three months America’s monetary base has grown by $1.7trn as the Federal Reserve has hoovered up assets using new money. Aswas expected to expand its emergency bond-buying programme beyond its initial size of €750bn . Money-creation has tacitly financed much of the emergency spending unleashed to help economies through the pandemic. It has also propped up asset markets.
It is only natural for money-creation on this scale to spark fears about inflation, which is the consequence of too much money chasing too few goods and services. All the more so because the pandemic has constrained production, at least temporarily, by forcing factories and shops to close and limiting global trade.
It is not. Several reasons suggest the hawks will probably be proved wrong again. Even accounting for the fall in oil prices, inflation is sharply lower in most places because households are slashing their consumption and saving more . Some of that is by necessity—it is hard to spend when shops are shut. But even as economies reopen, spending is likely to remain tepid, not least because unemployment is soaring.
The immediate risk, therefore, is not too much inflation, but too little, amid a slow recovery and a painful economic restructuring. Many firms will emerge from lockdown with huge debts. Many workers may need to move from one industry to another. In such an environment the chief danger will be that policymakers withdraw stimulus too soon. That is what happened in 2011, after the global financial crisis, when theraised interest rates.
Only after economies and job markets have healed will a sustained rise in inflation become a risk. Governments will emerge from the pandemic with much higher public debts, and they may be tempted to press monetary policymakers to keep interest rates low rather than to apply the brakes. Even then, inflation will become a threat only if central bankers buckle under the pressure and thus start to lose the faith of the markets. In other words, there will be a time to worry. But it is not now.
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