Is inflation coming?

Prospects for inflation in the US

From the end of February to the end of May 2020, broad money (M2) in the US grew by 16% . Is this significant increase inflationary? No, argue Cecchetti and Schoenholtz. They base their assertion on the results of a simple model in which inflation depends on its own history and the history of money growth. They ran a set of regressions of the four-quarter percentage change in the price index of personal consumption expenditures (PCE) on eight lags of itself and eight lags of the four-quarter percentage change in M2 for the periods 1962 to 2019 and 1995 to 2019. Under the assumption that from 2021 onward M2 growth returns to its pre-2020 average of 6 percent per year, they constructed dynamic forecasts of inflation for the five years through 2025. They found:

• The unprecedented spring 2020 burst in money growth does not herald a return even to high single-digit inflation, much less the double-digit price increases of the mid-1970s and early 1980s. Experience shows that inflation is driven by a highly persistent process, with short- and medium-term fluctuations only very loosely related to the time path of monetary aggregates;
• But if it does, we would expect to first see an increase in inflation expectations—beyond the pattern of recent decades—driven by anticipation of strong and sustained economic growth.

Is Inflation Coming?
By: Stephen G. Cecchetti, Kermit L. Schoenholtz – Brandeis University, New York University

Prospects for global inflation

A sharp rise in inflation could have devastating consequences. To contain it, central banks would have to raise interest rates, which would create financing problems for highly indebted governments, firms, and households. Historically, central banks have mostly been unable to resist government pressure for sustained budget financing. This has often resulted in very high rates of inflation, accompanied by large losses in the real value of most asset classes and political and social upheaval. In recent months, commodity prices, international transport costs, stocks, and Bitcoin have all risen sharply, and the US dollar has depreciated significantly. These could be harbingers of rising consumer prices in the dollar area. With inflation rates highly correlated internationally, higher inflation in the dollar area would accelerate price growth worldwide.

Will Inflation Make a Comeback?
By: Axel A. Weber – UBS

Prospects for inflation in the UK

The January 2021 Centre for Macroeconomics survey asked members of its UK-based panel whether inflationary or deflationary pressures would dominate in the upcoming decade and about the main driving forces of inflation:


Post-Covid inflation risks for the UK
By: Ethan Ilzetzki – LSE