The biggest dilemma for the central banks in the post-coronavirus world is what is going to follow: Inflation or Deflation. Policymakers always had to plan ahead for their monetary and fiscal policies, and life for them was so much easier before the massive lockdowns. Now they are creating money in unprecedented amounts with only the tiny clue of what is going to be the outcome.
The biggest dilemma for the central banks in the post-coronavirus world is what is going to follow: Inflation or Deflation. Policymakers always had to plan ahead for their monetary and fiscal policies, and life for them was so much easier before the massive lockdowns. Now they are creating money in unprecedented amounts with only the tiny clue of what is going to be the outcome.
The fresh money printed by central banks could give the opportunity to companies to buy time and rebuild their business and the general economy, but on the other hand, the lack of demand may create a gap between the supply and demand curve and force the markets to drop prices to reach equilibrium. Some will argue that Quantitative easing (Central Banks injecting money into the economy) doesn’t necessarily create inflation, and it is true. Central Banks are not looking to print money in a stable economy but are dropping cash to expand the economic activity of an economy which otherwise will face a recession. That is why years of quantitative easing didn’t create hyperinflation but help major economies such as the USA and EU to enjoy stable prices for a very long time.
Although, the crisis that the economies are facing at the moment is something new and Central Banks are not familiar with such a rapid decrease in demand. The demand for goods and services has already decreased dramatically and in some sectors, they expect up to 75% decrease in annual income. Meanwhile, since the beginning of the crisis, the Bank of England has increased money supply by another £750 billion while ECBs Pandemic emergency purchase program is a total of €1,350 billion. In a post-coronavirus period, central banks simply cannot remove all that money from the markets, and when the supply shock that is happening now turns to a demand shock where people will start buying bigger quantities after 3 months of lockdown, supply may not be able to catch up and prices will go up.
Many economists are deep into numbers and case studies to be able to find a solution. Reuters conducted a poll of 161 economists asking them about their opinion of what will be worst to follow: Inflation or Deflation? 70% of them see deflation and lower prices as the biggest threat to a post-coronavirus world.
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