Inflation Could Deflate Your Financial Stability
Get ready for inflation to come to a post-COVID world. Accommodative fiscal and monetary policies along with a strong V-shaped rebound are going to support price increases. Inflation will hit 2% by the end of 2021 and stay above 2% over the course of 2022 according to Business Insider online.
According to this article, a strong V-shaped recovery is already underway. While the second quarter of 2020 saw the deepest quarterly GDP contraction on record, 2020 will not register as the deepest recession in US history thanks to the sharp rebound from the third quarter onwards.
Moreover, as warmer weather sets in and vaccines are distributed to protect vulnerable segments of the population, the US economy will get another uplift from March onwards, especially in COVID-sensitive sectors like hospitality and travel. Our 2021 GDP growth forecast of 5.9% is a full two percentage points above consensus. We project that US GDP will achieve pre-COVID levels in early second quarter of 2021 and will also return to its pre-COVID path (in other words, where GDP would have been absent the pandemic shock) by the fourth quarter of 2021. Most others expect GDP to reach pre-COVID levels later in 2021.
Second, since the recovery is accelerating, we are less worried than consensus about longer-term scars to the private sector's willingness to invest or take on risk. This difference is key to our expectation that inflation will return more quickly than consensus believes. COVID-19 produced a shock more akin to a natural disaster than the typical end of a business cycle. Private-sector balance sheets were in relatively good shape when the pandemic began, as was the financial system.
What does this mean to you and me?
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