Inflation: will it stay or will it go?

Inflation will remain with us “for a while”, said Kenneth S. Rogoff, Professor at Harvard University and former Chief Economist of the International Monetary Fund. He expects slightly higher annual inflation of 3-4% in the USA and a little less in Europe. He sees several long-term price drivers, including the decarbonisation of the global economy, the trend towards deglobalisation triggered by the coronavirus crisis, and the demographic shift causing a ever-dwindling supply of skilled workers. Coronavirus has also left its mark here, with the USA alone reporting five million fewer employees than before the pandemic – and Rogoff does not expect this situation to recover. The diminishing independence of central banks is another factor. On the other hand, he only views supply chain disruption as a temporary issue.

Rogoff is adamant that we will not see 20 per cent inflation. When asked by a participant whether 3-4% is worse than 1.5%, he responded almost dispassionately by saying “that is immaterial”. Rogoff is convinced that the economy can work with any inflation that can be predicted with reasonable certainty. With regard to investment strategies, he warned against “inflation over-engineering”, explaining that “it is tough to hedge against rising interest rates” and that there is hardly any effective protection against inflation for investors. In any case, his long-term outlook for inflation tells a very different story: “In a couple of years, we will be battling to keep it high again.” After all, it is clear that a shrinking economy with 3-4% deflation would be significantly more distressing for the ECB than similar rates of inflation.

Rogoff sees some risks in the sharp rise in private and public debt triggered by the coronavirus crisis. However, he believes this risk is not as severe for industrialised nations, who can bear their debt burden without any problems due to extremely low interest rates. However, he considers many emerging markets to be vulnerable. Generally speaking, Rogoff says that it is difficult to predict when a particular national economy will experience a crisis. Crises usually emerge very suddenly even though various harbingers of doom have already been suggesting that something will happen for some time. Although a sharp rise in interest rates has been a common factor preceding many past crises, it is not currently possible to predict this.