Are we facing inflation or deflation in the years ahead? This question, so relevant today, was also posed by economists during the global financial crisis in 2009, when many economies took unorthodox monetary and fiscal measures at a time of high unemployment.

In the decade following the significant fiscal stimulus package the U.S. rolled out in 2009 – which included the Federal Reserve’s bold bond-buying program – inflation did not materialize. In fact, the Federal Reserve has expressed concern about not achieving its 2% target rate of inflation. Despite unprecedented fiscal stimulus and money printing, inflation has remained dormant due to the depressed labour and output markets.
Many pundits have recently expressed the opinion that it is very likely inflation will once again not materialize to a large degree, despite more monetary and fiscal policy actions than occurred in 2009 being implemented around the world in response to the pandemic. The difference this time is related to asset bubbles. The bursting of today’s bubbles in the world’s asset and credit markets would likely result from rising interest rates that could be brought on by extraordinary budget policy easing. The Federal Reserve has a keen eye on the resultant effects that stimulus has on the economy and, while inviting higher inflation rates potentially above its 2% target, it is committed to a low-interest-rate environment for a few years. This lays the groundwork for steady recovery and growth – hopefully.

The inflation worriers often overlook the fact that a rise in inflation is likely to cause interest rates to rise – either the Federal Reserve will raise its interest rates and start reversing its bond-buying program or bond vigilantes will drive bond rates higher in the expectation of higher inflation.