Pub. 16 2021-22 Issue 1

NEBANKERS.ORG 22 Perspective on Inflation Dynamics in 2021 Jeffrey Caughron , Managing Director, The Baker Group The Fear There is growing concern that the trillions of dollars of stimulus created by governments and central banks to fight the economic fallout of the coronavirus will explode through the economy and cause a surge in inflation in the second half of 2021. Sustained upward price pressures would cause governments and central banks to curtail pandemic relief efforts, strain workers trying to keep up with household bills, and risk eroding more than $40 trillion of retirement savings. But how justified are these fears? The History Let’s not forget that after the 2008 global financial crisis, these very same concerns were loudly pronounced as it was widely expected that massive government spending would trigger a surge in demand. But it never happened; much of the new money stayed on banks’ balance sheets, and the lesson was learned that cheap money alone will not produce a stimulative effect if you are caught in a Keynesian “liquidity trap.” What was needed, and did not exist at the time, was pent-up demand and the wherewithal (disposable income)