Key Points

  • Today’s public health response to the COVID-19 disease is causing mass unemployment and precautionary savings, which depress demand and exert downward pressure on inflation.
  • Today’s fiscal and monetary stimulus is necessary medicine to prevent a larger than necessary economic contraction and consequent human suffering.
  • Longer term, exploding deficits, soaring debt, and money printing raise the risk of inflation as of a toxic side effect.
  • As we approach the coming recovery, investors should be on the lookout for cheaply priced inflation protection, including REITs, small-cap stocks, commodities, and emerging-market value stocks.


Now is too soon to worry about inflation from a public policy perspective given the immediate humanitarian need for disaster relief. Many millions of newly unemployed people need cash now to pay bills and just to buy food for themselves and their families. Hesitating to provide help now because of worries about inflation later would be beyond the pale.

Now is too soon, also, to expect to see a rising Consumer Price Index (CPI). Rising unemployment and precautionary savings are currently exerting downward pressure on inflation. According to the US Bureau of Labor Statistics, CPI fell by 0.4% in March. Longer term, however, exploding deficits, soaring debt levels, and money printing raises the risk of a toxic bout of inflation. Investors should consider the opportunity provided by declining inflation expectations to diversify into newly cheap inflation-hedging assets.

Falling Employment Is Deflationary

A shocking number of people are losing their jobs. Approximately 17 million people across the United States filed for unemployment insurance during the three weeks ended April 4, representing almost 11% of the 150 million people working in March (FRED, 2020). Add expected new claims for the week of April 11 and the unemployment rate is likely near 15% and climbing fast. Layoffs and furloughs will continue in coming weeks. Seemingly outlandish estimates that the peak unemployment rate will hit Great Depression levels (Bartash, 2020) of 20% or even 32%1 later this year now seem uncomfortably plausible.

Have you increased or decreased your spending over recent weeks? When people lose their jobs, they must immediately cut back discretionary spending. More important, those who keep their jobs reduce spending to increase precautionary savings. This sudden decline in spending reduces aggregate demand more than aggregate supply and thereby puts downward pressure on the prices of goods and services.

Unsurprisingly, inflation expectations have dropped. The current 10-year breakeven inflation (BEI) rate of 1.2% is below the Fed’s 2.0% target. Note that the market is pricing a prolonged period of below-target inflation. The expectation for the inflation rate from 2025 through 2029 is well below target too. Specifically, the five-year BEI rate five years forward is only 1.4%.