Worried About Inflation After Covid? Don’t Be


Does the world need to fear inflation again? The global supply of money has been rising at a rapid clip, with the broader measure increasing by more than 20% last year in the U.S. alone. With an economic recovery and boom likely to follow the distribution of vaccines, many people are worried that all this cash will lead to higher prices.

I have some reassuring news (albeit with caveats): It is not likely that the next major macroeconomic problem will be inflation.

Most important, Covid-19 has already led to a lot of inflation — but it has come in the form of lower quality, not higher prices. Most schools have not raised their tuition rates, for example, but the online experience is worse for many students than the in-person experience, often much worse. A visit to a hospital or restaurant involves a higher degree of fear and inconvenience than before.

Overall, many different aspects of consumer life have become worse or even impossible in the last nine months. That is the equivalent of a price hike, though it does not appear as such in the economic statistics.

As vaccine distribution proceeds, and as spring arrives and seasonal factors lessen the impact of the virus, many of these deteriorations in quality will shrink and eventually disappear. So just as there has been a lot of unmeasured inflation in the recent past, there will be a lot of unmeasured deflation in the near future.

To understand forthcoming inflation rates further, consider why monetary aggregates such as M2 have been rising so rapidly. It is not that the U.S. Federal Reserve wishes to relive the experience of the 1970s. It’s that many businesses have been borrowing while they can, fearing they may end up strapped for cash as the pandemic continues.

From that point onward, there are two possible paths. The first is that businesses will actually need that extra cash, due to low consumer demand and a stalled recovery. In that case, the potentially inflationary boost from a higher money supply would be offset by lower demand elsewhere in the economy. The velocity of money would be weak, and there would be no reason to expect major inflationary pressures.

The second possible path is that the recovery will proceed at a rapid clip, and businesses will have extra cash on their hands for a while. That likely would translate into lower borrowing for the rest of the year and a smoothing of monetary flows — and no major increase in inflationary pressures.

There will, however, be some areas of the economy in which inflation will likely be high. Consider a sector in which demand is largely seasonal and has been stifled by the pandemic, and supply in the short run is inelastic. One obvious example is summer vacation travel.

If vaccination and recovery proceeds fairly quickly, excess demand for summer vacations is likely. To be sure, airlines will run more flights, more people will put their homes or apartments on Airbnb, and other adjustments will be made. But some supply bottlenecks will remain.

Say you want to take your family on that delayed trip to Disney World. The grounds and rides have only so much capacity, so there will be a squeeze, though it’s hard to predict its timing and duration.

Will Disney raise its prices to head off that surge in demand? Probably not. It is a commonplace observation in macroeconomics that many wages and prices are sticky in the short run, and suppliers do not wish to risk consumer goodwill with rash price hikes. It’s more plausible that Disney World, not wanting to be seen as benefiting from the pent-up demand created by the pandemic, will keep prices as they are.

Instead of inflation, in other words, there will be demand rationing. For Disney World, this will mean that you need to reserve your visit well in advance. The same phenomenon will apply to top restaurants, where reservations are likely to be harder to come by. Rationing demand is preferable to raising prices, especially since the demand boom will probably not be permanent.

So will there be inflation? Yes, if it’s defined as quality deterioration — more waiting — instead of higher prices. It will be strongest for unique goods whose supply is hard to augment, and for goods for which Covid has created pent-up demand. This will result in personal inconvenience for many Americans, but it won’t be a macroeconomic problem.

Crucial U.S. markets for interest rates and indexed securities, as well as the dollar, are not showing major inflation risk. That makes sense — especially since there are more urgent problems facing the U.S. economy that deserve greater attention.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include "Big Business: A Love Letter to an American Anti-Hero."

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.