While it is broadly recognized that the monetary and fiscal stimulus implemented since the onset of the coronavirus was necessary, the resulting increases in government debt and central bank liquidity have given rise to concerns that an upsurge in global inflation may be around the corner. We find little evidence to support such fears.
In recent decades, inflation has become increasingly divorced from money growth. As for government debt levels, the cost of high debt is not inflation, but rather seems to be disinflation and weak economic performance, reflecting increased uncertainties for the private sector. For the emerging markets, in contrast, higher debt levels do appear to be associated with increased inflation, but the relationship falls well short of statistical significance.
In our view, deep structural forces, such as aging demographics, the advance of innovation and automation, and increasingly entrenched inflation expectations, have driven inflation down and kept it low. We expect the restraint from these factors, if anything, to become more pronounced in the years ahead.