Do pandemics normally lead to rising inflation?

Across much of the world prices are rising at the fastest pace in decades. In America prices leapt by 4.3% in the year to August, according to the Federal Reserve’s preferred measure—a 30-year high. In the euro zone annual inflation hit 3.4% in September, the highest rate in over a decade. Some economists worry that the world economy is entering a period of “stagflation”—weak growth and high inflation—reminiscent of the 1970s.

That covid-19 might usher in a prolonged spell of high inflation would buck a historical trend. A recent paper by Dennis Bonam and Andra Smadu, two economists at the Dutch central bank, looks at the effect of pandemics on inflation and concludes that they typically lead to lower, not higher, price pressures. Using data going back to the 14th century, covering six European countries and 19 pandemics, the authors find that such events have historically caused inflation to fall for more than a decade, on average, yielding an inflation rate about ​​0.6 percentage points lower than if the pandemic had not occurred. The more prolonged and severe the outbreak, the more pronounced and persistent the negative effects on trend inflation.

Pandemics disrupt the balance between supply and demand. Today supply-chain disruptions—affecting semiconductors, energy and much else—are leading to supply shortages. Historically, however, the dominant economic effect of pandemics was falling demand. As populations were decimated by disease, consumption fell, investment withered and economies suffered for decades, keeping prices in check. This time around policymakers responded with trillions of dollars worth of fiscal and monetary stimulus, propping up demand and softening the economic damage.

As for recent inflation spikes, central bankers remain confident that they are transitory, the result of “base effects”—whereby unusually low prices create the illusion of unusually high prices one year later—pent-up demand and short-term supply bottlenecks. The Fed anticipates inflation settling at 2.2% next year. Its long-run forecast, of 2%, is the same as it was before the pandemic. The bank’s relative calm in the face of rising prices means it is taking the long view, and perhaps even studying history. ■