Inflation risks and the global monetary boom

Abstract

▀ Market nervousness about inflation has increased, in part due to strong monetary growth in the major economies. While we still think that the monetary boom is not a cause for anxiety, upside inflation risks have risen. ▀ Money growth has eased in the major economies in recent months but remains strong, mainly due to central bank asset purchases. Purchases are likely to fall in 2021 but will remain substantial. As a result, broad money growth in the major economies could remain at a double‐digit pace for a second year. ▀ Meanwhile, though private credit growth has indeed slowed, it's not clear it will move into negative territory as bank credit standards are not tightening the way they did after the global financial crisis. Reopening could provide a fillip, too. ▀ So far, rapid money growth has not translated into higher inflation because the velocity of money has fallen sharply. Central banks have to a large extent (correctly) been accommodating a much‐increased demand for liquidity. ▀ What happens to velocity in the next few quarters, however, is unclear. After the global financial crisis, velocity kept trending down, partly due to regulatory changes. But after the great depression and WWII, velocity recovered somewhat. Now, a release of forced savings and lower financial and economic risk might push velocity back up. ▀ A recovery in velocity, together with likely money and output growth rates for 2021, might be incompatible with low inflation. Inflationary upside might be slow to appear given inflation's inertial nature, but central banks will need to keep a close eye on inflation risk indicators over the next year.