The Economist, dated Dec 12-18, 2020, has a cover story, "Will Inflation Return ?". The question is not if, but when. According to the article, three arguments for increased inflation include the following:
1. Pent up demand
2. Aging societies which reduce the number of overall workers
3. Complacent politicians, who are happy to spent more, even if it goes over 2% inflation targets in order to satisfy liabilities, specifically mentioning those related to health care for an aging population, see point 2 above.
I find the article a competent summary, to be sure. And the question to me is not whether there will be inflation. There will be. The question I am having for myself is twofold:
1. When will it show up?
2. How will it show up?
I find that this, along with many other macro-level items are some of the most interesting aspects of finance for me. While they are tough to bet on individually, that is exactly what I am going to discuss here.
Regarding when it will show up, this seems to be strongly related to how much you believe in reason number 1. Personally, I don't think that there is all that much demand for durable goods, food, consumables etc. Instead, I think that the pent up demand is for things that people have not been able to do: travel and eating out.
That said, I believe there are two countervailing forces to this pent up demand.
That is, for those who want to eat out, they cannot have a do-over on meals eaten in 2020. Those meals are gone, that opportunity to make the revenue on restaurant dining is lost for waitstaff, bartenders and the like. So, is there going to be more demand in 2021 than 2020 for dining? Perhaps. Let's assume that people are all vaccinated (both doses) by end of March 2021. That leaves 9 months to do more dining out. Will there be more, yes. How much more? My instinct is that people will likely only increase modestly, perhaps 10-20% for a couple of reasons:
1. There's still a good deal of unemployment and uncertainty in the economy.
2. People will not be able to eat out more than that even if they want to. People still have kids. It is still expensive. And moreover, people will still have to endure waits, reservations and other things that reduce the incentive to dine out -- like the desire to throw and spend money on parties.
3. Many restaurants will simply not be open again (replacement restaurants) until 2022.
Similar logic follows for travel, but that will have a rebound that is even less drastic than dining.
But, will everyone be vaccinated early enough for that to matter? That is, do I expect people to have gotten their shots before June 2021 so we're back to 'normal'? No. I think that we're likely to be close to Summer's end before everyone who wants a vaccination has gotten one. And that means, we'll likely be living a masked life for more than another 6 months.
Inflation based on pent up demand requires us to be comfortable to dine out, go out to entertainment venues without masks, and live more-or-less normally. That will not be the case early enough in 2021 to spark inflation based on demand.
What about policy-based inflation? The article does an excellent job discussing this and how the inflation shown continues to be shielded/used by governments issuing short term debt. The conclusion of the article recommends against this since inflation could be so damaging to governments who are more sensitive than ever.
This risk is something to be more concerned with. And with the increase in the money supply, it seems like this could have spillover effects. Asset inflation, where stocks, homes and other expensive assets become more expensive than they would be otherwise seems like a real concern, especially if you are poor and do not hold assets at this point. Personally, I continue to watch and wait, but regardless, I'm hopeful that the real crisis is over, and we can get back to personal finance best practices in 2021.
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