Peterson Institute for International Economics
“High inflation is unlikely but not impossible in advanced economies”
Olivier Blanchard

Post covid-19 world economy: Inflation or deflation?

Olivier Blanchard, from the Peterson Institute for International Economics (PIIE), analyses the chances of inflation and deflation in the post-covid-19 economy:

  • According to traditional metrics, his central scenario is an economy with low levels of inflation: “Unemployment is exceptionally high, and even if, when the lockdown is relaxed, it will be partly matched by exceptionally high vacancies, it is hard to see a strong wage push on the horizon. Commodity prices have fallen and oil prices have collapsed”. Under this scenario “deflation” could be of the main challenges to avoid. 
  • However, he also provides certain conditions that could make possible the “wrong high inflation” scenario, although he assigns it a low probability to occur. This scenario would require the combination of three elements: a large increase in the debt-to-GDP ratio, a very large increase in the neutral rate of interest a fiscal dominance over monetary policy. 
  • The author alerts following the debt rise some governments, particularly populist ones, may be tempted “to keep the interest rate low, so as to decrease the debt burden” leading to overheating the economy, higher levels of inflation, and even to hyperinflation, reducing the real value of the debt “ but not without major costs for the economy”.

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