Inflation is the market’s number-one risk according to Bank of America’s monthly survey of global asset managers, displacing Covid-19 for the first time since February 2020. A net 93 percent of investors in the survey expect inflation to rise in the next twelve months, the highest reading in the history of the survey, which dates back to 1995.

What everyone sees is the unprecedented speed and scale of the fiscal and monetary response to the pandemic. Year-on-year growth in the monetary base is seven times larger than the peak during the Great Recession. As the American public emerges from the pandemic fully vaccinated and cashed-up, inflationary consequences will become evident, the thinking goes. 

Harvard professor Lawrence Summers says the $1.9 trillion fiscal stimulus risks triggering “inflationary pressures of a kind we have not seen in a generation.” And this is without the potential rollout of President Biden’s “Build Back Better” plan. That’s at least another $3 trillion to be spent over ten years on infrastructure and strategic industries.

Starting next month, core PCE inflation could be expected to push above the 2 percent mark due to base effects from last year when the economy was shut down. After this burst of transitory inflation, everything we see at a micro level points to a more subdued inflation outlook than a durable shift above target in the inflation trend.

To learn more about how inflation will evolve, we must first understand the dynamics of inflation before the pandemic started. A sober reading of the data may reveal more than beguiling storytelling.

Food Prices

Food inflation was 0.9 percent in 2019 and has averaged 2 percent over the last twenty years. In 2020, food prices s

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Photo: Bloomberg