Will Coronavirus lead to higher Inflation External Insight treasury@arlingclose.com

The following insight was written by Ian Williams of Charteris. You can find their website here.

Ian Williams was the guest speaker in our recent webcast, "QE: Price Inflation or Asset Price Inflation".

The pandemic crisis now gripping the world has been described by many prominent politicians as a war, and although its effect on mortality fortunately is nowhere near the human cost of the 20th Century’s two world wars, its global economic effects are beginning to look comparable in scale. As many countries begin to emerge from the worst phase of the crisis and the lockdowns begin to ease, a key economic debate has naturally surfaced which will occupy policymakers and investors for many years to come.

The question is whether the lasting economic consequences of this crisis lead to more deflation, or, will the gigantic monetary and fiscal stimulus now being deployed by governments across the globe finally mark the start of a period when inflation returns to the world economy at levels we have not seen since before the financial crisis in 2008?

This is an important question for all investors to consider because the outcome will have a profound effect on financial and real asset prices – and the outcomes will be very different under the two scenarios.

It is a polarising and fundamental debate partly because it pits two economic schools of thought against each other. Keynesians who focus on demand dynamics and monetarists who focus on money supply. Unsurprisingly, they have diametrically different views on the subject. They also disagree about what happened in the period after the financial crisis and explain the past 10 years of persistently low inflation in very different ways.

In this article we will try to steer you through the debate to help you understand what we think will happen and why – and what it means for your investment.

This debate between monetarists and Keynesians has played out many times before but perhaps most notably, in the context of Quantitative Easing (QE 1, 2 & 3) in the aftermath of the 2008 financial crisis.

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