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Will Inflation Make a Comeback?

Economic forecasting models have long been notoriously inaccurate in predicting inflation, and COVID-19 has further complicated the challenge. Those who heed current consensus forecasts of persistently low price growth could be in for a rude awakening.

ZURICH – Current forecasts by many banks, central banks, and other institutions suggest that inflation will not be a problem in the foreseeable future. The International Monetary Fund, for example, expects global inflation to remain subdued until the end of its forecast horizon in 2025. But could those who heed these forecasts be in for a rude awakening?

Economic models have long been notoriously inaccurate in predicting inflation, and COVID-19 has further complicated the challenge. While economic forecasters calibrate their models using data from the last 50 years to explain and predict economic trends, today’s economic conditions have no precedent in that period. Today’s low inflation forecasts are thus no guarantee that inflation will actually remain low.

Even without additional inflationary pressure, reported inflation rates will rise significantly in the first five months of 2021. By May, UBS expects year-on-year inflation to rise above 3% in the United States and toward 2% in the eurozone, largely owing to the low base in the first half of 2020, when pandemic-related lockdowns began. The higher rate therefore does not point to rising inflationary pressure, though an increase above those levels would be a warning sign.

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