Hyperinflation warning: How prices could skyrocket in post-coronavirus world

It is already obvious that the initial impact of the coronavirus economic crisis will be strongly disinflationary. Prices have fallen sharply in sectors that have been most affected by the lockdowns, including restaurants, hotels, airlines and housing. Moreover, the past two weeks have seen an extraordinary dip into negative territory for oil prices for the first time in history.

Headline US inflation will, therefore, fall markedly below the Federal Reserve’s two percent target, while the eurozone and Japan will record negative inflation in a matter of months.

In a recent report for the Financial Times, though, Karen Ward, the chief market strategist for Emea at JPMorgan Asset Management, warned that within a year, we will be looking at a very different picture.

Ms Ward argued that the virus-induced deflation will soon fade, replaced by hyperinflation.

She wrote: “For a start, oil prices will pick back up.

“Russia, Saudi Arabia and the US — the three largest producers of oil — are caught in a game of chicken. They have so far failed to come up with a solution that sufficiently addresses the current oversupply in the market.

“But none can sustain Brent crude below $40 a barrel for long.

“Moreover, the shifting inflationary outlook is not solely dependent on the trajectory for energy prices. The increase in inflation will be broader across a range of goods and services.

“When stay-at-home restrictions are removed, demand will roar back. Families will flock to restaurants, shops, shows, and mini-breaks — anything but remaining in the homes they have been confined in.”

According to Ms Ward, households will, in many cases, have built up savings to fund such a binge.

Particularly, she says, in Europe, thanks in large part to the generosity of governments’ employment subsidies which should mean that the rise in unemployment is modest.

She added: “Service providers such as restaurants will be keen to capitalise on the return of their customers and recoup the losses of the spring and early summer.

“Food and theatre prices will rise.

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“The rise in the broad price level, alongside some recovery in oil prices, will see overall inflation jump.

“This might prove temporary if the short-term supply constraints ease and governments withdraw their generous fiscal injections in a timely manner.

“However, there is also a risk that policymakers leave the stimulus in place for too long.”

In an exclusive interview with Express.co.uk, though, Jonathan Portes, Professor of Economics and Public Policy at King’s College, London, argued that deflationary forces will continue to be strong.

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He said: “I think hyperinflation is extraordinarily improbable in developed economies.

“It is true to say we don’t know whether the problem will be deflation or inflation.

“My view is that the most likely scenario is that deflationary forces will still be strong.

“People will still be nervous about spending and investing and that will depress demand.”

Mr Portes noted: “I could be wrong.

“But if I were wrong, it would be a very good thing for the economy. We would be very much better off if people want to go out and spend, and businesses invest.

“A bit of inflation is a lot better than deflation.”

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