The COVID-19 crisis has been a huge near-term deflationary shock with US inflation metrics plummeting in April. Yet, inflation uncertainty has spiked – beyond transient shortages, a rise in debt issuance and/or new costs from reconfigured global supply chains could drive future inflation higher. Nonetheless, the rapid technology adoption could soften the blow by boosting productivity, especially in education and healthcare.
The COVID-19 outbreak has completely altered our near-term economic and social landscape. It will undoubtedly also have many long-term societal and economic effects, which investors are trying to decipher in order to establish effective investment strategies.
One area of particular investor interest has been inflation. For many years, the challenge had been to actually bring inflation up to stated targets. However, investors now are pondering whether a different type of challenge lies ahead. This may seem odd given that the short-term impact so far has been clearly deflationary – intensely so according to the latest US data. Both headline and core US Consumer Price Index inflation slowed markedly in April. Although we are used to seeing big swings in the headline measure (largely driven by energy prices), the 0.7 percentage point deceleration in core inflation was unprecedented. The pandemic-induced shutdown in demand has decimated pricing power in a range of industries far beyond energy (Figure 1).