Second, the economy is likely set for a much more rapid rebound after the pandemic than was the case in the aftermath of the financial crisis. Put simply, once a vaccine is widely distributed, pent up demand among the American public for a very wide range of services and goods should be unleashed, and, while supply should be ramped up quickly also, the very pace of growth could prove inflationary.
Finally, it may be that, in the aftermath of the crisis, political steps are taken to address income inequality. This could, depending on the results of the November elections, include minimum wage increases, universal health care and reforms aimed at a more progressive tax system. Regardless of the social merits of such ideas, a redistribution of income from upper-income households, who tend to save more of their income, to lower and middle-income households, who have a higher propensity to spend, could also prove inflationary.
If inflation were to emerge, it would likely boost long-term interest rates and force the Fed to tighten monetary policy. It would also put additional pressure on the budget, given the huge amount of debt that would then need to be serviced, potentially forcing the government to raise taxes, likely on richer households.
In the long run, this would hopefully lead to a more balanced approach to monetary and fiscal policy, with both the federal government and Federal Reserve adopting more rational counter cyclical policies when the economy is healthy.
However, for investors today, with long-term bond yields at historic lows, it is a reminder that real assets, including stocks, real estate and precious metals can serve an important, although long-redundant role, in protecting a portfolio against the risk of inflation.
David Kelly is chief global strategist at JPMorgan Funds.