Spiralling infections and record deaths in the US pose a big hurdle for markets. The winter months were never going to be easy, given the complete disregard for social distancing and facial masks by a reckless Trump administration. The full effects of increased travel over Thanksgiving and Christmas will not be felt in the infection rates until next month.
It is tempting to conclude that the high level of unemployment left as a result of the economic recession will lead to a lower baseline for the CPI. The huge technological changes wrought by Covid-19 – working from home, increased use of robotics particularly in the realm of logistics/deliveries – suggest that core inflation is likely to remain benign regardless of the shift in spending patterns.
But there is a converse argument for higher inflation. The housing market took off early in the year, and the net result is a surge in homeowner equity. This will provide a strong source of stimulus for the consumer going into 2021. If the rollout of the vaccine is successful and services start to open up, the combination of higher inflation in air fares, for example, and strong consumption on goods could push core inflation higher next year.
However, a word of caution. The technological trends alluded to in this commentary are powerful. An uptick in core inflation during 2021 should not be confused with the broader secular trend.
