With No Inflation in Sight, Why the Inflation Debate?

It’s a question that divides the financial world: Is inflation returning? One camp contends that governments’ no-expense-spared response to Covid-19 has put developed economies on course for rising prices on a scale unseen in decades. The other says the pandemic hasn’t altered the dynamics of the past dozen years or so when deflation, rather than overheating, has been the big threat. There’s been little sign of a surge in price gains, and most economists aren’t expecting one, yet global markets have priced in inflation accelerating to multiyear highs. Those expectations have been spurred by the U.S. Federal Reserve’s new determination to allow inflation to run higher during recoveries and the prospect of more stimulus spending under U.S. President Joe Biden. Here are some of the arguments for and against a return of inflation:

Inflation is always and everywhere a monetary phenomenon, the free-market economist Milton Friedman famously argued. In other words, there’s too much money available for chasing the goods and services on offer. Those who support this widely held belief say the multitrilliondollar wave of money created by governments and central banks to fight the economic fallout of the virus will, sooner or later, wash through the whole economy and push prices up. There was great fear that massive stimulus would trigger a surge in demand after the 2008 global financial crisis, but it never happened; much of the Fed’s new money stayed on banks’ balance sheets. This time, the cash is making its way into the pockets of consumers and companies.