Coronavirus: The effect on inflation is unclear – BNP Paribas

FXStreet reports that there is no doubt that the Covid pandemic will lead to a short but deep world recession. However, the effect on inflation is unclear, Louis Boisset from BNP Paribas informs.

"In the short-term, many observers expect disinflationary bias, due to the drop in demand; the decline in non-food commodity prices; open economies may have enough inventory to meet the demand."

"The medium-term inflation outlook is more ambiguous, one of the main questions is to know which one between the demand and supply shock is dominant."

"When the health measures will get lifted, inflation can surge given the remaining constraints on supply. The acceleration of the shortening process of global value chains may trigger an increase in production costs and a subsequent increase in inflation."

"From the supply side, this crisis will for sure lead to bankruptcies and a higher level of unemployed people but, unlike wars or natural disasters, the current situation could not result in equivalent destruction of production capacity. From the demand side, precautionary behaviors and a still high level of uncertainties could have a lasting negative effect on private demand, and thus on inflation dynamics."