U.S. Markets

Coronavirus legacy will be weak global inflation: economists

BENGALURU/LONDON (Reuters) - The coronavirus pandemic is more likely to leave a legacy of weak or falling prices for goods and services than to trigger higher global inflation, according to a majority of over 160 economists polled by Reuters.

The finding underlines how early fears disruption to supply chains would lead to price hikes have since been overtaken by a consensus that the real problem is a deep slump in demand as the crisis hits millions of livelihoods.

Beyond being a symptom of recession, weak price growth or outright deflation also creates more headaches for the world’s biggest central banks, many of whom have for years failed to reach official inflation targets.

Over 70% of more than 160 economists from Asia to Europe to the Americas in the latest poll said the bigger threat once the pandemic is under control would be lower prices. That proportion was roughly evenly spread by region as well.

“Once the pandemic subsides, disinflation is the bigger worry as the pandemic is currently the main progenitor of supply friction,” said Robert Carnell, ING’s chief economist for Asia-Pacific. “Any inflation spikes should be temporary and give way to lower inflation or a lower price level after their initial impact.”

(GRAPHIC: Reuters Poll - What is the greater risk once the pandemic subsides?: )

That has not stopped some investors hedging against the risk unprecedented amounts of monetary and fiscal stimulus will eventually start to produce price bubbles, prompting them to buy gold, inflation-linked bonds or other assets expected to at least hold their value.

Beyond the fact the virus continues to spread in some parts of the world and fears persist of a second wave later this year, part of the uncertainty is due to the global pandemic lockdowns being unparalleled in their effect on economies.

A separate Reuters poll showed the global economy is in a deep recession with the rebound expected to be slow and long. The outlook has worsened further or at best stayed the same over the past month, according to nearly all the economists surveyed, despite steady re-openings of many economies from lockdowns.

“Rising inflation is consistent with a V-shaped recovery,” noted global economists at Citi. “But there is little evidence of a sustained pickup in inflation,” they said, noting the evidence so far confounded the orthodox theory of big increases in money supply leading to inflation.

If anything, the current dilemma for central bankers is that the effect of the crisis is raising more questions about policies based on consumer inflation targets that now look less likely to be achieved, even as asset prices soar.

Major developed-economy central banks have struggled to achieve those targets in recent years and aren’t expected to for at least another three, despite expectations for them to expand their balance sheets to record highs.

(GRAPHIC: Reuters Poll - Major economies inflation outlook: )

U.S. Federal Reserve policymakers have a median forecast of inflation edging up to 1.7% by the end of 2022. The European Central Bank this month downgraded its forecast to just 1.3% for the same year – meaning both would be short of official targets of at or near 2%.

ECB chief economist Philip Lane last month acknowledged weak euro area inflation – already at four-year lows - could become more persistent and deviate even more from central bank targets.

In Japan, the fear is a return to outright deflation, a risk cited by several BOJ members in April, even before data showed core consumer prices fell for a second straight month in May.

A Federal Reserve staff paper last month noted while the 1970s oil crises triggered inflation by hitting the supply of fuel to the economy, and the massive U.S. interest rate hikes of the early 1980s brought prices lower by dragging down consumer demand, the coronavirus crisis had managed to hit both supply and demand in the world’s biggest economy at the same time.

Olivier Blanchard, senior fellow at the Peterson Institute for International Economics, agreed low inflation was most likely but cited the outside chance a second wave of infections would force governments to borrow to fund disaster relief programmes while pressuring central banks to keep rates low to decrease the debt burden.

“While today’s Fed would not yield to such pressure, a future Fed, with a chair appointed by a populist president, might be more willing to bend and keep rates low for too long, leading to overheating and inflation,” he said.

He noted the probability of such scenarios around the world was very small, “but it is not quite zero.”

Reporting by Rahul Karunakar and Mark John; Additional reporting and polling by correspondents in Bengaluru, Johannesburg and Buenos Aires; Editing by Ross Finley