Hi Auré

Thanks for taking the time to comment. You are making a couple of wrong assumptions here. Let mere explain:

First, inflation is a forward-looking variable. It means expectations toward inflation in the future will affect price setting decisions today and thus affect near term inflation.

Now, GDP and economic activity more broadly (the GDP aims to be a proxy of activity) is a trailing measure. The pullback in economic activity can be contributed to the pandemic and lockdowns. It is primarily a supply shock (lockdowns force stores to shut and facilities of production to run at low capacity), but there are also demand-dampening implications (postponed spending due to infection-risk, referred to as wait-and-see behavior).

Demand is curbed artificially by policymakers (who this time around due to the nature of the virus actually wants demand to be low in some areas for a period), but at the same time massive stimulus (fiscal and monetary) has offset drawdowns partly and injected a lot of liquidity into the economy. When reopening, demand is expected to ramp up quickly, while supply will do so more gradually.

I did follow the asset valuations, and they are a result of more liquidity in the economy, not less. And there is certainly not an equal amount of production.

Remember also, that inflation measure price changes. If Q2 and Q3 of 2020 were artificially low, the measure for 2021 will come of a low base.

How much inflation there will be in the very near term, crucially depends on the developments with regards to the pandemic (vaccines, lockdowns/reopenings etc.)

Regards, Asger

I’m an economist doing policy design and analysis. I write about the economy, taxation, innovation and growth, policy design, and financial markets.

I’m an economist doing policy design and analysis. I write about the economy, taxation, innovation and growth, policy design, and financial markets.