Don’t worry about inflation—yet

NEVER BEFORE have central banks created so much money in so little time. In the past three months America’s monetary base has grown by $1.7trn as the Federal Reserve has hoovered up assets using new money. As The Economist went to press, the European Central Bank (ECB) was expected to expand its emergency bond-buying programme beyond its initial size of €750bn ($830bn). Money-creation has tacitly financed much of the emergency spending unleashed to help economies through the pandemic. It has also propped up asset markets. The Fed is buying junk bonds; the Bank of Japan has stepped up its purchases of equities and could soon own over a fifth of many large Japanese companies (see article). All the while economies are contracting. As a result, America’s base-money-to-GDP ratio may grow by nine percentage points in the second quarter of 2020. That would be by far the biggest such rise in decades.

It is only natural for money-creation on this scale to spark fears about inflation, which is the consequence of too much money chasing too few goods and services. All the more so because the pandemic has constrained production, at least temporarily, by forcing factories and shops to close and limiting global trade. It is no surprise, therefore, that a vocal minority of investors and economists predict an inflation surge, including researchers at Morgan Stanley; Ray Dalio, a hedge-fund manager; and a clutch of monetarist academics. Similar forecasts after the financial crisis in 2007-09, when central banks’ balance-sheets also ballooned, proved to be wholly wrong. But, in contrast to then, much of today’s stimulus is ending up in households’ bank accounts. In April, for instance, Americans’ total incomes rose by 11% thanks to emergency support from the government (and, indirectly, from the Fed), even as overall wages and salaries fell by 8% as 20.5m workers lost their jobs. More money in consumers’ pockets, according to hawkish logic, means this time will be different—and that inflation is more likely.