Economy
Virus Crisis Augurs an Inflation Breakout, Morgan Stanley Says
(Bloomberg) — The coronavirus crisis is likely to bring an end to a 30-year run of disinflationary forces and herald the return of accelerating inflationary pressure that’s likely to overshoot central bank targets, Morgan Stanley said.
“For the first time in a decade, we are finally getting coordinated monetary and fiscal easing — a policy dynamic that we have viewed as essential to get out of the low-growth, low-inflation loop,” Chetan Ahya, chief economist and global head of economics at Morgan Stanley, wrote in a research report. “The scale of easing is also unprecedented during peace time.”
So far, major central banks have slashed interest rates and ramped up bond buying, while governments have dedicated more than $8 trillion in stimulus to cushion the blow from shutdowns designed to stem the virus’s spread. This, combined with likely measures to tackle worsening wealth inequality, will start to drive inflation, Ahya said.
Government efforts to contain the virus are exacerbating existing inequalities between the rich and poor. To deal with this, Ahya said, policy makers will have to take action that ends up reorganizing the forces that have been putting downward pressure on prices for decades: trade rules, technology and the world’s corporate titans.
“Disturbing this trio will also mean disrupting the key structural disinflationary forces of the past 30 years,” he said.
Morgan Stanley’s call flies in the face of an emerging consensus that the looming global recession will deepen disinflation trends and could even push some economies into the deflationary trap seen in Japan since the 1990s. From oil and copper to hotel rooms and clothing, prices have tumbled as lockdowns stifle demand.
Ahya said pronounced inequality and overtly expansionary monetary and fiscal policy see the U.S. as most at risk of higher inflation during this cycle.
“We see the threat that inflation emerges from 2022 and will overshoot the central banks’ targets in this cycle,” he said. “The driving forces of inflation are already aligned and a regime shift is under way. The near-term disinflationary trend will quickly give way to reflation and then inflation.”
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