Economists and CIOs believe fears central bank and government stimulus measures to fight the economic effects of Covid-19 will lead to an inflationary shock are overdone.
One of the defining features of the coronavirus pandemic has been the sheer scale of the policy reaction as global lockdowns shut economies for months on end and pushed many countries into recession.
Fiscal stimulus measures in the US and the European Union, for example, added up to around 13% and 4% of GDP respectively as of 24 July 2020, according to Statista.com.
This surge in government borrowing and growing central bank balance sheets has caused an acceleration in money supply growth, according to global head of asset allocation at Invesco Paul Jackson.
US M2 growth, for instance, is currently in excess of 23% year-on-year, the highest level on record. This creates the possibility of higher inflation over the next year or two, reasoned Jackson.
Indeed, a paper from the Institute for Economic Affairs (IEA) in June warned the policy reaction to the pandemic could lead to double-digit inflation at some point in the next two years.
The IEA's Juan Castañeda and Tim Congdon predicted a big bounce-back in financial markets as well as in aggregate demand and output once the pandemic is under control by mid- to late-2021.
"The extremely high growth rates of money now being seen will instigate an inflationary boom," they argued. "The scale of the boom will be conditioned by the speed of money growth in the rest of 2020 and in early 2021.
"Money growth in the US has reached the highest-ever levels in peacetime, suggesting consumer inflation may move into double digits at some point in the next two or three years."
With Jackson pointing out a generation of investors have never had to deal with inflation running at even 5%, "such an outcome could change the way markets behave", including by changing the correlation between bonds and equities.
However, while some portfolio managers have admitted to positioning to hedge against this possibility, others see the scenario as unlikely to materialise.
Fahad Kamal, CIO at Kleinwort Hambros, noted fears of an inflationary wave after the US Federal Reserve quintupled its balance sheet in the three years following the Global Financial Crisis proved misguided, with prices having remained muted over the past decade.
For liquidity to result in inflation, Kamal explained, money velocity, or company and consumer spending, and the money multiplier, or company and consumer borrowing, must both remain high. However, both of these tend to collapse in a recession.
While money in the US has been created, the slowdown in circulation has more than offset that rise, meaning inflation has fallen.
"It is true that the scale of the central banks' bazookas is much bigger this time, but so is the demand destruction being wrought across the global landscape," Kamal said.
"Inflation is likely to remain tepid due to huge slack that occurs in recessionary times such as now. And there is plenty of slack given double-digit unemployment in the US; a similar level is likely in the UK as the tapering furlough schemes fully cease in October."