Inflation Expectation in 2021. Table of Contents

What-to-expect-from-the-Global-Economic-Inflation-in-2021

Three reasons why we think that US inflation will increase.

Is Inflation Coming Back in 2021?

Three reasons why we think that the US inflation will increase:

  1. By March 2021, the low prices of last March and April that fell because of the coronavirus will become the new basis for comparison, so year-over-year measures of inflation will jump.
  2. Vaccines rollout will allow people to go back to their normal spending patterns by the second half of 2021.
  3. Companies will not be able to meet the increased demand, as they will be struggling with the ongoing consequences of the pandemic, so they will raise prices.

Higher inflation should make the Fed roll back its monetary stimulus and thus will be bullish for the USD.

One of the biggest questions that concern the economy and divide the financial world strongly is whether inflation is on its way back.

Our war against the coronavirus and the unlimited spending has put developed economies on a path for rising prices on a scale not seen in decades, so will it really return?

Is Gold the “exceptional hedge instrument” against inflation?

What is the Economic Cycle?

First, let’s understand how the economy works and why inflation is expected to rise in the negative interest rates environment, which will continue for several years.

The central bank reduces interest rates to stimulate the economy and investment in times of crisis.

As time passes, expansion, economic growth, and profits increase, followed by higher consumer spending.

Prices then start to go up as the economy returns to work, and inflation grows.

Then the central bank raises rates to curb inflation, and so on.

Therefore, governments and central banks may face pressure to scale back pandemic relief efforts, worth about $20 trillion, according to Bank of America, if they trigger prices to rise.

This massive spending will reduce the value of currencies and raise inflation globally.

What to expect from Global Interest Rates in 2021?

Why will inflation rise again in 2021?

Causes and Arguments:

  1. Money Supply
    Most analysts agree that the wave of printing money created by governments and the unprecedented monetary and fiscal stimulus to fight the pandemic we saw in 2020 will ultimately lead to higher prices and inflation in 2021.
  2. Household Spending Recovery
    With many people receiving vaccines, spending rates and the economy will recover in earnest in the second half of 2021. Then, the scenario of higher prices will start to take shape as consumer spending increases, which will push the economy and inflation higher. However, there remains a fear that people won’t return to spend quickly, despite reopening economies, and consumers have more options to go out, as they will remain cautious and will tend to save.
  3. Loose Central Bank Policies
    One of the reasons most analysts expect inflation to increase is simply because central banks are more willing than ever to allow it to rise.
  4. Supply Chane Problems
    There is already evidence that disruptions in supply chains have led to higher prices, with a shortage of imported goods and products in countries. In China, for example, food price inflation has accelerated in recent months due to pressure on imports from the travel and trade ban because of the pandemic.

Will Oil continue to suffer from COVID-19 in 2021?

Four reasons why we think the US inflation will grow faster

Inflation in the United States isn’t expected to return to the Fed’s target of above 2% before 2023 (currently at 1.4%).

However, this doesn’t mean that the trend of ultra-low inflation rates will go on for long, as several reasons will make US inflation gradually rise more quickly, including:

  1. Last March and April, prices fell sharply with the beginning of the Coronavirus, and with it, year-over-year readings of inflation dropped. Nevertheless, after April 2021, these lower readings will become the new basis for comparison. As inflation rises as expected, annual measures of inflation will jump too.
  2. The vaccines-rollout will allow people to return to normal spending patterns by the second half of 2021. The entertainment and tourism industry – including restaurants, hotels, and airlines – will regain some strength as demand picks up.
  3. Companies won’t be able to meet the increasing demand while they continue suffering from the consequences of COVID-19, so the value of the limited supply of services will increase.
  4. The Federal Reserve adjusted its monetary policy in a way that allows inflation to rise. The Fed wants inflation to average 2%, which means it will have to exceed 2% for a significant time to offset the chronic downside mistakes accumulated over the past decade. In the short term, the Fed won’t raise interest rates until it achieves its two goals: sustainable maximum employment and inflation at 2%. The US central bank won’t respond to curbing any increase in inflation until they are assured that it is persistent.

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The impact of higher inflation of the US dollar

The rise in commodity prices is inversely related to the dollar performance.

Rising inflation in the second half of 2021 will lead to a drop in the dollar, as expected in 2021.

Bank of America warns that the massive stimulus that the Biden administration will pass in the presence of the blue wave may increase pressure on the dollar, which would push the Fed to start tapering the bond-buying program later this year.

Finally, the situation isn’t much different for the ECB or the Bank of England – both want inflation near 2%.

They would welcome any positive signs indicating the start of a price hike.

However, high infections continued public lockdowns, and the slow distribution of vaccines will still obstruct these goals.

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