If you are wondering about inflation, you are in good company. With unprecedented government stimulus around the globe being deployed with record speed, it is natural to wonder if such loose monetary policy will lead to higher inflation. While it is still too soon to tell for certain, Syntrinsic does not see higher inflation as one of the likely outcomes of this “Great Lockdown”1 caused by COVID-19. If anything, we are more concerned about the possibility of a prolonged period of extremely low inflation or even deflation. To the degree that moderate inflation of around +2% per year has been a sign of a healthy economy in this modern era, sluggish inflation would evidence persistent weakness in the global economy.

While economics textbooks the world over equate government stimulus with causing higher inflation, we do not believe inflation will be a threat because of the declining effectiveness of monetary policy, the growing influence of outside forces that counter inflation, and the extreme decline in aggregate demand for goods and services as a result of the Great Lockdown.

Previously, inflation has occurred when the supply of money increases relative to the productive output in the economy. Money supply is commonly defined to be a group of safe assets that households and businesses use to make or to hold as short-term investments, such as savings and checking accounts. In the 1970s, money supply in the U.S. was increased to finance budget deficits, which led to double-digit inflation that ultimately caused a recession.

It might appear that we face a similar situation today. Over the past two months, the U.S. has increased the money supply significantly (see chart: M2: Money Stock Measures) to support the economy during the biggest drop we have seen in aggregate demand and GDP since the Great Depression, or as Jerome Powell stated last week, “…the biggest shock our economy has felt in modern times.”2

Recent economic stimulus is what we call “supportive economic stimulus.” The primary goal of such stimulus is to ease financial stress, ensure a functioning financial system, and moderately support cashflows for individuals and corporations while the economy shelters in place. (For more on Federal Reserve stimulus programs Syntrinsic Recap: Market Liquidity and the US Federal Reserve)

However, money supply alone has become less influential over recent decades. As the Federal Reserve has stated, “The importance of the money supply as a guide for the conduct of monetary policy in the United States has diminished over time.”3 Many economists believe that changing demographics, technological innovation, and globalization have been led to this breakdown in the historic relationship between inflation and the money supply.

Prior to the crisis, inflation already faced headwinds. Syntrinsic noted in our 2020 Capital Markets Forecast that, “…we believe aging demographics, ongoing technological innovation, and continued globalization will anchor inflation on a secular basis.”4 And if technological innovation held inflation in check before, just consider the implications as technology profoundly changes workplace dynamics, the retail sector, and increased reliance on automation rather than human beings for labor.

The crisis at hand already has led to an extreme decline in demand for goods and services, evidenced by declines in retail (-16%) and manufacturing output (14%) in April alone. This demand for goods and services caused the Core Consumer Price Index (CPI) to drop 0.4% in April, the largest monthly drop in records dating back to 1957.5 (See chart: US Inflation Monthly Change)

As we mentioned in The Shape of Recovery a few weeks ago, our base case for emerging from this crisis is for a U-shaped or swoosh shaped recovery. While we wish for something speedier, the complicated re-opening, permanent loss in demand, declining consumer confidence, increasing corporate leverage, and expected bankruptcies will continue to weigh on growth and slow the economic recovery.

To move the economic recovery along, we would hope to see fiscal programs that are designed to spur economic growth as well as continued supportive programs like we have seen to offset the current shortfall in consumption. Without these, the economy could be in recession for several quarters and could enter a period of disinflation last seen in the Great Recession. While some people see rising inflation as one of the key risks of additional stimulus we do not share that concern for all the reasons outlined above. Fiscal policy played an important role in economic recovery during and after the Great Financial Crisis. During 2008 and 2009, the increase in deficit spending stimulated growth in the economy, which in turn brought inflation from negative back to low but normalized levels. The high inflation many had feared has not materialized in the twelve years since.

All in all, some measure of inflation is good for the economy as it contributes to sustainable economic growth, employment, and long-term interest rates. Without healthy inflation in the 1-2% range, we risk global economic stagnation like what Japan has been struggling with for decades. Given an extremely low-interest-rate environment that could persist for years or even decades, increased deficit spending and economic stimulus are reasonable options to spur growth and potentially generate moderate inflation in our economy. We need the stimulus now and would welcome some normalized inflation along the way.


  1. Term coined by the International Monetary Fund
  2. Jerome Powell, Economic Forecast, May 14, 2020
  3. “What is the money supply? Is it important?” U.S. Federal Reserve, December 16, 2015
  4. See Syntrinsic 2020 Capital Markets Forecast, page 25
  5. Wall Street Journal, “Coronavirus Lockdowns Trigger Big Drop in Consumer Prices”