10 Leaders The EconomistFebruary 13th 2021
2 and a menu of therapies to ensure that covid-19 need rarely be
life-threatening. But that outcome is not guaranteed.
To the extent that medicine alone cannot prevent lethal out-
breaks of covid-19, the burden will also fall on behaviour, just as
it has in most of the pandemic. But rather than national lock-
downs and months-long school closures, which come at a huge
price, the responsibility should fall more heavily on individuals.
Habits like mask-wearing may become part of everyday life. Vac-
cine passports and restrictions in crowded spaces could become
mandatory. Vulnerable people will have to maintain great vigi-lance. Those who refuse vaccination can expect health-educa-
tion and encouragement, but limited protection. As our special
report on the travel industry makes clear, people’s desire to live
their lives will ultimately be hard to resist, even in autocracies
like China that may be reluctant to leave zero-tolerance behind.
The persistence of acute infections and chronic, debilitating
“long covid” means that the next stage of the pandemic sounds
grim. But even if covid-19 has not been completely put to rest, the
situation is immeasurably better than what might have been.
The credit for that goes to medical science. 7T
he debate about whether high inflation will emerge out of
the pandemic is becoming more pressing. In January under-
lying prices in the euro zone rose at their fastest pace for five
years. In America some economists fear that President Joe Bi-
den’s planned $1.9trn stimulus, which includes $1,400 cheques
for most Americans, may overheat the economy once vaccines
allow service industries to reopen fully. Emerging bottlenecks
threaten to raise the price of goods. Space on container ships
costs 180% more than a year ago and a shortage of semiconduc-
tors caused by this year’s boom in demand for tech equipment is
disrupting the production of cars, computers and smartphones.
Headline statistics on price rises will soon contribute to the
sense that an inflationary dawn is breaking. They will go up auto-
matically as the collapse in commodities prices early in the pan-
demic falls out of comparisons with a year earlier, and the recent
rise in the oil price begins to bite—on February 8th Brent crude
rose above $60 a barrel for the first time in more than a year. In
Germany the reversal of a temporary cut in vat
has already helped year-on-year inflation rise
from -0.7% to 1.6% in a month.
For most of the past decade the world econ-
omy’s problem, judged by central banks’ targets,
has been too little inflation, not too much. As a
result it is easy to view the coming acceleration
in prices as welcome. In fact, it is worth worry-
ing about, for several reasons.
One is that it weakens the hand of those arguing for more fis-
cal stimulus in places that need it. There is little prospect of the
euro zone sustaining higher inflation, for example. Its main rate
of interest has not been cut during the pandemic and its deficit
spending remains inadequate given its economic outlook and
lack of monetary firepower. Much as the European Central Bank
mistakenly raised rates in response to a temporary burst of infla-
tion in 2011, the danger this time is that a temporary acceleration
in prices emboldens fiscal hawks who are complacent about the
dangers of a depressed economy. The same danger lurks in Ja-
pan, the archetypal low-inflation economy. Its prices started
falling during the pandemic. Japan will probably escape defla-
tion this year, but beyond that it looks destined to remain in a
low-inflation trap, having seemingly given up on its brief at-
tempt to spring out of it in the mid-2010s.
Higher inflation could also cause gyrations in monetary poli-
cy in America, where rising inflation expectations and a fasterrebound mean price rises are more likely to prove persistent. Fi-
nancial markets imply a one-in-five chance that consumer
prices will grow by at least 3% per year on average over the next
five years. The Federal Reserve has promised to keep interest
rates low and to keep buying bonds because it wants inflation to
overshoot its 2% target, in order to make up for today’s shortfalls.
But its new “average inflation targeting” regime does not allow
for an enduring or large overshoot. Eventually the central bank
will want to raise interest rates to bring inflation back down.
The faster prices rise this year, the sooner that tightening
could come. Richard Clarida, the Fed’s vice-chairman, has said
that the central bank will make up only for inflation shortfalls
that have occurred over the preceding year, meaning the point at
which catch-up is complete could come surprisingly quickly. On
February 7th Janet Yellen, the Treasury secretary, tried to reas-
sure critics of Mr Biden’s stimulus by saying that America has the
tools to deal with inflation. But higher rates are not without con-
sequence, and if the Fed finds itself pouring cold
water on an overheating economy, the risks of
another recession will rise.
Higher rates also hold deep implications for
markets. Almost everything about today’s finan-
cial landscape is premised on central banks
keeping interest rates low for a long time. Cheap
money lies behind the idea that the government
can spend however much it likes—including,
say, on Mr Biden’s planned infrastructure bill—and underpins
today’s sky-high stockmarket values and abundant credit. An
abrupt change in the interest-rate outlook would be painful, as it
was in 2013 when the Fed’s hawkish comments led to what be-
came known as the “taper tantrum”.
On Wall Street higher rates would be a shock. In emerging
markets they would be agonising. Many have been experiment-
ing with unconventional monetary policy and bigger budget def-
icits, following the rich world (see Finance section). But their ef-
forts assume that global financial conditions will stay loose.
Higher interest rates in America to see off inflation would mean
a stronger dollar and capital outflows from emerging econo-
mies, as in 2013. This would imperil their finances and make it
harder for them to fight the effects of the pandemic. There is a lot
to like about the idea of escaping the low-inflation, low-rate par-
adigm of the past decade. But higher inflation will expose the
world economy and financial markets to a bumpy ride. 7Inflategate
How higher inflation could disrupt global economic policyThe world economyFive-year inflation expectations
US, market-impliedprobabilities,%
80
60
40
20
0
2019 20 21Above 3%Below 1%