Expect Inflation To Accelerate? Here's 8 Reasons To Expect Decelerating Inflation

In its Quarterly Review and Outlook for the First Quarter of 2021, Lacy Hunt makes a case for decelerating inflation.

"Contrary to the conventional wisdom, disinflation is more likely than accelerating inflation. Since prices deflated in the second quarter of 2020, the annual inflation rate will move transitorily higher. Once these base effects are exhausted, cyclical, structural, and monetary considerations suggest that the inflation rate will moderate lower by year end and will undershoot the Fed Reserve’s target of 2%. The inflationary psychosis that has gripped the bond market will fade away in the face of such persistent disinflation.

"After declining 5.2% in 2020, or the most since World War II, world-wide real per capita GDP is estimated to rise 4.7% in 2021. The United States will perform even better, rising 6.2%, after a contraction of 4.9% in 2020. The U.S. growth rate this year could be the fastest since 1984 and possibly even since 1950 (Chart 1).

"Five considerations suggest that such growth is not likely to lead to sustaining inflation."

Lacy said 5. I added a 6th bullet point from his discussion, then added 2 more points of my own.

As classified by the National Bureau of Economic Research. The low in inflation occurred after all of the past four recessions, with an average lag of almost 15 quarters from the end of the recessions. (Table 1 Inflation Troughs Below)

This pattern in productivity is quite apparent after the deep recessions ending in 1949, 1958 and 1982 (Table 2 Below). Productivity rebounded by an average of 4.8% in the year immediately after the end of these three recessions and unit labor costs were unchanged. The rise in productivity held down unit labor costs.

Supply chains were badly disrupted by the pandemic. Low-cost producers in Asia and elsewhere were unable to deliver as much product into the United States and other relatively higher cost countries.

This allowed U.S. producers to gain market share. As immunizations increase, supply chains will be gradually restored. Thus, the pandemic cost the low-cost producers market share which was shifted to domestic producers.

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Another restraint on inflation is that the pandemic greatly accelerated the implementation of inventions that were in the pipeline. Necessity is the mother of invention, as has been demonstrated in earlier crisis situations like wars.

Thus, the technology du jour is not the same as the technology of a year ago. This will also serve to act as a restraint on inflation. Much of the technology substitutes machines for people, communication without travel, and work without offices.

This is where the fallacy of the broken glass comes into play. Many businesses failed in the recession of 2020, much more so than normal. As survivors and new firms take over their markets, this will be reflected in GDP, but the costs of the failures will not be deducted.

Both having worsened as a consequence of 2020.