Economic Perspective: Will Inflation Eventually Surge?

MARY WALDEN:

“Today’s program asks if inflation will eventually surge. Mike, prices are now falling in many segments of the economy including: gas prices, prices for hotels and many food prices. But some are worried these changes are temporary, and with all the money the government is pumping into the economy prices will jump after the virus crisis passes. Is this a valid concern?”

MIKE WALDEN:

“It certainly is a valid concern. When I was in my first economics class about 50 years ago I remember the instructor said that inflation when inflation occurs when you have too many dollars chasing too few goods and services. So the question here is when the economy comes back, how fast will it come back? That is, to what extent will people really increase their spending, and also to what extent we’ll be able to see the supply part of our economy come back? Will businesses be able to ramp up their production in order to provide products and services to meet increasing consumer demand?”

“I think there’s a good chance that that will happen, and I say that for a couple of reasons. One is that most economists think that when we get over this crisis, and the economy begins to reopen, it’s going to reopen slowly. And we will not see a surge in spending. We will see spending increase gradually over time. And then the second reason is that a tremendous amount of effort has been expended by the federal government in order to try to keep businesses that are out there afloat.”

“One way that we could have inflation is if we lost a large number of businesses through bankruptcies through this crisis. So I think the monies that we’re spending on helping small businesses, and large businesses alike, stay healthy and at least be able to stay intact is a reason why we would expect to see inflation not take off because once the economy begins to get back on track those businesses will be around to start increasing their output.”

“But it’s all about supply and demand to the extent that we can boost supply as demand increases we won’t have a surge of inflation.”

Mike Walden is a William Neal Reynolds Distinguished Professor in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.