Why deflation may be a bigger risk than inflation

▀ Concerns about high inflation in the medium term are in our view overdone. In fact, we think the bigger risk is some economies sliding into deflation, due to the coronavirus pandemic's long‐lasting negative impact on demand, which will intensify existing global disinflationary trends. ▀ We do not think the recent acceleration of monetary growth will lead to rapid inflation, despite the strong historic relationship between the two. The current monetary growth is taking place in extremely unusual circumstances, which may alter the usual link with inflation, and may also be temporary. ▀ Meanwhile, most market‐based measures of deflation risk have risen recently – in some cases to historic highs. Some household surveys point to slightly higher inflation, but this may reflect short‐term volatility in prices for key goods. ▀ A slide into deflation would have a variety of negative consequences, including feeding back into private saving, weakening growth, and potentially raising debt sustainability issues in some economies.