Market & Topical Perspectives

Inflationary Impulses in a Post-Covid World

Inflationary Impulses in a Post-Covid World

Though the policy response to the global financial crisis of 2008–09 was of a magnitude never before seen, concerns about the potential negative impacts of huge federal debt balances appeared to serve as a constraint on governments and central banks across the developed world, limiting the size of bailout packages, encouraging austerity measures and, in some estimations, undercutting the effectiveness of their efforts. Presented with another chance at crisis-solving with the outbreak of Covid-19, policymakers unleashed waves of monetary stimulus and fiscal support that already have dwarfed the accommodations of the 2010s—and appear to be far from complete.

Key Takeaways

  • Key-Takeaway

    Massive fiscal and monetary intervention in the US along with the ongoing rollout of vaccines should allow the economy to fully recover from the dislocations of the pandemic and outperform earlier expectations. In contrast, most other economies, with the notable exception of China, seem likely to experience some degree of permanent scarring from Covid-19.

  • Key-Takeaway

    Inflation is likely to accelerate. While the initial move higher may be merely the byproduct of base effects and price distortions that arise as the economy reopens, a more durable shift may emerge as a result of a large positive output gap and the uncertainties associated with the Fed’s new flexible average inflation-targeting policy framework.

  • Key-Takeaway

    We believe even more pernicious levels of inflation could result from a fiscal regime shift toward permanent accommodation combined with a Fed unwilling or unable to adjust policy to tame price increases. While such fiscal dominance does not seem likely given the Fed’s independent status, very high government debt levels raise the risk of policy alignment.

  • Key-Takeaway

    Regardless of the inflation environment that emerges following this extraordinary episode in economic history, First Eagle will remain focused on building all-weather portfolios that seek to mitigate risk and to help prevent the permanent impairment of capital.