Do epidemics usually lead to higher inflation?
across a lot Global prices are rising at the fastest pace in decades. Prices in America jumped 4.3% in the year to August, according to the Federal Reserve’s preferred metric — a 30-year high. Annual inflation in the euro zone was 3.4 percent in September, the highest in more than a decade. Some economists worry that the global economy is entering a period stagflationWeak growth and high inflation – reminiscent of the seventies.
The novel coronavirus COVID-19 could lead to a prolonged period of high inflation that would buck a historical trend. a last paper By Dennis Poonam and Andra Smadow, two economists at the Dutch Central Bank, look at the effect of epidemics on inflation and conclude that they usually lead to lower rather than higher price pressures. Using data going back to the 14th century, covering six European countries and 19 pandemics, the authors find that historically such events have caused low inflation for more than a decade, on average, yielding an inflation rate about 0.6 percentage points lower than if The epidemic did not happen. The longer and more severe the outbreak, the more pronounced and persistent the negative effects on the trend amplification.
Epidemics disrupt the balance between supply and demand. Today, supply chain disruptions – affecting semiconductors, power, and many other things – are leading to supply shortages. Historically, the predominant economic impact of epidemics has been a decline in demand. With the population decimated by disease, consumption declined, investment faded and economies suffered for decades, constraining prices. This time policymakers responded with trillions of dollars in fiscal and monetary stimulus, boosting demand and mitigating economic damage.
As for the recent inflation spikes, central bankers remain confident that they are temporary, as a result of “fundamental effects” – where unusually low prices create the illusion of unusually high prices one year later – pent-up demand and short-term supply bottlenecks. The Fed expects inflation to stabilize at 2.2% next year. Its long-term forecast, at 2%, is the same as it was before the pandemic. The bank’s relative calm in the face of rising rates means it is taking a long view, perhaps studying history. ■