Coronavirus update: Are there risks of deflation?

With the world economy in recession - The IMF forecasts global growth at –4.9 percent in 2020-and with many individual countries experiencing much deeper downturns than this (including the UK), how strong are the risks of deflation?

Deflationary fears come from sharply rising unemployment, pressure on wages to fall as businesses contract employment along with a drop in the world prices of many commodities.

Consumer spending power is weak which adds to pressure to cash-strapped businesses to lower their prices to lift sales, improve their cash-flow and reduce their dependency on extra debt to keep afloat.

However, there has been an unprecedented monetary and fiscal stimulus in many countries with central banks cutting policy interest rates to near zero (some have chosen negative rates) alongside a huge fiscal stimulus designed to protect jobs and support the incomes of those most affected.

Coronavirus has also impacted on production in supply-chain industries leading, in some cases, to shortages of component parts and raw materials. This might be a factor causing an upturn in the rate of producer price inflation in the months to come.

The overall impact is uncertain. The recession of 2020 will help to keep consumer price inflation very low and more stimulus rounds are expected if deflation risk becomes too high.

Suggested reading:

FT (July 2020): Andy Haldane signals inflation fears as he hails rapid UK recovery

Reuters (July 2020): Coronavirus legacy will be weak global inflation

IMF (June 2020): Reopening from the Great Lockdown: Uneven and Uncertain Recovery