CAMBRIDGE – Massive fiscal and monetary stimulus programs in the United States and other advanced economies are fueling a raging debate about whether higher inflation could be just around the corner. Ten-year US Treasury yields and mortgage rates are already climbing in anticipation that the US Federal Reserve – the de facto global central bank – will be forced to hike rates, potentially bursting asset-price bubbles around the world. But while markets are probably overstating short-term inflation risks for 2021, they do not yet fully appreciate the longer-term dangers.

To be clear, huge macroeconomic support is unequivocally needed now and for the foreseeable future. The pandemic-induced recession is worse than the 2008 global financial crisis, and parts of the US economy are still in desperate straits. Moreover, despite promising vaccine-related developments in the fight against the coronavirus, things could get worse.

Against this backdrop, the real inflation risk could materialize if both central-bank independence and globalization fall out of favor. In the near term, policymakers are right to worry that, if the economy continues to heal, stimulus measures and consumers’ cash savings will fuel an explosion in demand. But this is unlikely to lead to an overnight inflation blowout, mainly because price growth in modern advanced economies is a very slow-moving variable. Even when inflation reached double digits in many rich countries in the 1970s (and rose above 20% in the United Kingdom and Japan), it took many years to collect a full head of steam.