Economic theory states that printing money simply leads to inflation. Those having the ability to print clearly have the advantage and everyone else suffers as their savings have reduced purchasing power. Such fears exist again today, following the large public giveaways funded from further quantitative easing and government borrowing. Indeed, in response to the global financial crisis of 2008, inflation did rise. However, this was short lived and the program of quantitative easing has widely been commended as being instrumental in helping avoid a more damaging deflationary spiral caused by a contraction in the banking industry and consequential recession.
Today, banking liquidity has been oiled with central bank action and fiscal giveaways deployed to smooth supply and demand shocks. Inflation or deflation is thus likely to be more localised and change over time as economies sustain a period of lockdown which impacts some activities more than others, followed by, hopefully, a quick resurgence in currently restrained activities.
In the short term, during the lock down phase, we envisage a disinflationary period. Oil prices have fallen significantly due to a huge drop in demand with little reduction in supply such that some grades of oil are costing more to store than their worth. This price reduction is currently feeding into CPI data. Nevertheless, there is evidence too that food prices have risen with supermarkets removing special deals and discounts. Prices of some manufacturing components have risen too as some factories close e.g. in Italy for car components, and computers and other IT spend has been on the rise through the lock down period, with a boom in on line retail causing inflation in logistics and delivery.
Longer term, even when workers return to their posts and production lines begin again, a public, shell shocked by the suddenness by which their world changed, may be more cautious spenders when their incomes resume, particularly if there is still a reasonable chance of lock down measures being repeated. Thus, non-essential (discretionary spend) items may suffer ongoing poor demand and lead to discounting as manufacturers try to shift unwanted goods.
In conclusion, we suspect the crisis will reduce inflation in the advanced economies to near zero this year but that it will return roughly to its pre-crisis pace in 2021 on the assumption the virus is being contained and economies have returned to normal productivity.