COVID | Global | Monetary Policy & Inflation
• Global inflation fell sharply in the early months of the Covid-19 crisis, mainly because of oil
• Core inflation fell most significantly in the US but has now begun to snap back
• I expect DM inflation to be higher over the next decade than in the last
• The key drivers of this will be less global integration and central bank policy
One of the most interesting (and important) debates underway is the inflation outlook for the post-Covid-19 (C-19) world. In the near term, the C-19 crisis has worked to lower headline inflation rates across the global economy. In the G7 economies, the inflation rate fell from 2%oya in January to 0.2%oya in May. In my EM sample, the rate fell from 4%oya in February to 2.1%oya in May (Chart 1). Rates across the world ticked back up in June and (based on early-reporting countries) rebounded even more in July.
As the near-term deflationary shock from the immediate C-19 slump fades, the key issue is what comes next. As C-19 unfolded, there was widespread agreement among both the analyst community and market participants that the crisis would be a profoundly deflationary event. Market pricing of forward inflation (as reflected in inflation swaps, for example) slumped to a low in mid-March (Chart 2). Since then, however, they have rebounded to about the same (depressed) level that they reached in 2019H2; the uptick since mid-May has been particularly pronounced.
This readjustment up in medium-term inflation expectations is appropriate and probably has further to run. In my view, the longer-run scars left on the global economy by the C-19 crisis could tilt inflation upwards in the decade ahead for two reasons.
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