This research was published on September 23, 2020

​The Covid-19 crisis has propelled fears of both deflation and inflation, fueling a debate about the future of the price stability that has underpinned the economic backdrop of the last 30 years. In our new inflation primer, we take a comprehensive look at the structural and cyclical foundations of the anchored inflation regime, deflation and inflation risks from Covid-19, as well as what it would take for the regime to actually break.

​The near-term risk is stronger on the deflationary side but policy has contained deflationary forces that materialized at the start of the crisis. Meanwhile, the monetarists’ argument that money supply growth will drive inflation suffers from similar obstacles as in 2008: for money growth to drive inflation, it also needs to drive credit growth, spending, and do so in the context of tight labor markets. While today we’re clearing more of these hurdles than in 2008, the economy is not in a place where inflation is likely.

​Throughout our analysis we stress that inflation is ‘always and everywhere a policy error’ — more so than a ‘monetary phenomenon.’ In the U.S., which has delivered a robust economic policy response to Covid, the biggest near-term risk to price stability is the failure of political will to continue stimulus — particularly as economic policy has to offset weak health policy outcomes. In the longer-run the risk to the anchored inflation regime will remain two-sided as policy willingness to let the economy run tight — or even push on a tight economy — will always be politically popular.

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