Research & Investment Strategy

COVID-19 update: A disinflationary shock - Part 1

Key points

  • The inflationary impact has been one of the most debated macroeconomic effects of the COVID-19 shock. The virus is likely to have different effects on different sectors and result in a greater dispersal of prices.
  • Some sectors will suffer supply-capacity reduction from measures to contain the virus. But these sectors are likely to be less than one-third of consumer price baskets. Even here, it is not clear demand will outstrip pared supply.
  • The virus presents other difficulties in analysing general price change – missing data, changing consumer weights and quality adjustments. On balance, we expect these will weigh on recorded inflation over the coming years.
  • Our broader assessment is that the pandemic primarily presents a demand shock, that is likely to dominate over the next few years, weighing on inflation and threatening a fall in inflation expectations.
  • We forecast 2020 inflation averaging just 0.4% in the Eurozone, 0.5% in the US, 0.6% in the UK and 0.1% in Japan. Base effects should see changes in annual rates for 2021 to 0.7%, 1.7%, 1.0% and -0.1% respectively.

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