In the aftermath of the global financial crisis of 2018, many analysts and commentators expected inflation to diminish the debt burdening the global financial system. The central banks’ policies of Quantitative Easing led to asset inflation, while traditional inflation measures remained low. This state of the financial system challenged the idea that inflation is a significant factor in asset management and investment. But is this view justified?

Can one really call the present financial landscape of tepid growth, suppressed interest rates, and inflation below the target of central banks, The New Normal? Of course, here one has to limit this narrative to the countries with more stable currencies, as countries such as Russia, Turkey and Argentina experienced inflationary problems.

The inflation target of 2% supplemented the central banks’ efforts to stimulate the economy. With interest rates near zero, they could not lower them further directly, so they subtracted the expected inflation rate from the nominal interest rate to bring the real interest rate down a little lower. However, the desired inflation rate still failed to manifest.



Focusing on the US as the supplier of the current global reserve currency with several challenges, one can observe unprecedented phenomena in the political field leading up to the 2020 elections. The low inflation environment has emboldened part of the political spectrum to start proposing programmes of massive government spending to further stimulate the economy.

The proposals include an environmental revamping of the economy (The Green New Deal), universal basic income, federal funds for free tuition, or even increased military spending. Along with the possible debt write-down, these programmes would inject massive amounts of cash into the economy, likely affecting a broader range of assets than just real estate and stocks. Could such policies cause the return of inflation through food and commodity prices?

Meanwhile in Europe, the outgoing ECB president Mario Draghi joined the FED with his concerns about low inflation and indicated substantial stimulus in the future. The primary aim is to fight deflationary pressures, as the 1,3% inflation rate of today is far below where the ECB wants it to be.

With the strongest economy in the EU, Germany, running a budget surplus, the options for buying their bonds are getting more limited; this could lead the ECB to focus more on buying equity, thus bringing the EU even closer to the US in terms of real estate and asset inflation. It is difficult to see how buying shares would benefit the overall economy and not just the shareholders.



The failure to reach the target inflation rate in the most developed economies of the world has led some economists to propose that the inflation target should be raised. In fact, the FED itself has published a primer discussing the “downside inflation surprise of 2017”. A new strategy named price-level targeting calls for the new future inflation target of one percentage point for every year that inflation has been below the 2% mark.

Mario Draghi of the ECB has also mentioned a symmetrical inflation targeting that would give inflation above or below 2% equal weight. This means they would welcome deviations around the 2% mark as long as inflation averaged out to the target 2% over time.

Could we see an upward surprise in the near future and should economists be more cautious in accepting new conditions in the most developed economies of the world as stable? The US in particular faces a worsening fiscal situation with low bond yields and a strong dollar, a situation that is historically untenable in the long term.

Image source: shutterstock


David Prezelj
David Prezelj

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