Inflation Outlook Stays Low, National Champions In Favor, Unemployment Rate Surprises


  • Inflation: More or Less?
  • EU Seeking to Create National Champions?
  • More Unemployment Than Meets The Eye

Five months into the COVID-19 crisis, I still venture out only occasionally. The local pool has reopened, allowing me to swim laps a couple of times each week. I’ll make the occasional trip to the home improvement store, to address a long list of repair and gardening projects. On Saturday night, we’ll take out food from a local restaurant, in an effort to keep our favorite eateries in business.

The biggest thrill I have each week is my Saturday trip to the grocery store. What used to be routine has become exhilarating: the freedom of being out, interacting with other people, and enjoying the colorful arrays at the market provides the lion’s share of my week’s excitement. I traverse each and every aisle slowly, and I always end up purchasing more than I need.

I have noticed that food prices seem quite a bit higher than they used to be. That is understandable; as more people are eating at home more often with restaurants restricted, supply chains have struggled to adapt. But I do not understand the frequent concerns I hear among investors about the risk of inflation. If anything, the pandemic will push the price level in the opposite direction.

Today’s inflation fears stem from the immense amount of policy support that has been implemented around the world in an effort to counteract the economic consequences of the pandemic. Deficits and debt have surged, and central banks have run the virtual printing presses to help finance the effort. This combination, which some have likened to Modern Monetary Theory, can be a precursor to higher inflation. Concern over this outcome led the price of gold to over $2,000 per ounce recently, an all-time high.

Weekly Economic Commentary - 09/11/20 - Chart 1

But as we noted earlier this month, rapid increases in the money supply are not translating into an excess of credit or demand. A majority of the new reserves remains on bank balance sheets, as lenders exercise care in extending credit during these uncertain times. Bank regulators have encouraged financial companies to conserve capital, putting a further brake on credit creation.

Relief distributed directly to consumers in the form of stipends or unemployment support has kept spending from slumping. But households in many countries have increased their saving rates significantly in preparation for potential financial challenges ahead. The expiration of government support programs will limit consumption and entrench a conservative mind-set.