There’s hardly any question that carries greater weight in economics right now, or divides the financial world more sharply, than whether inflation is on the way back.

One camp is convinced that the no-expense-spared fight against Covid-19 has put developed economies on course for rising prices on a scale they haven’t seen in decades. The other one says the virus is exacerbating the conditions of the past dozen years or so -- when deflation, rather than overheating, has been the big threat.

Yesterday's Problem — Or Tomorrow's?
The debate touches every area of policy, from trade rivalries to unemployment benefits, and everyone has an interest in the outcome.

Governments and central banks may face pressure to curtail their pandemic relief efforts, already worth some $20 trillion according to Bank of America, if they trigger a spike in prices. Workers and consumers will see the impact in wage packets and household bills. More than $40 trillion of retirement savings is at risk of erosion if inflation returns.

Inside the economics profession, there’s something else at stake too. Charles Goodhart –- a scholar at the London School of Economics who, at the age of 83, has seen a few orthodoxies rise and fall –- argued in a recent paper that what happens to inflation after the pandemic “will affect macroeconomic theory and teaching, perhaps forever.”

For now the jury is out. Some countries reported a drop in prices early in the crisis, and a jump more recently. In the bond markets and among consumers, measures of expected inflation have edged higher. But the data that will ultimately settle the question could take years to trickle in.

In the meantime, investors and the public are left to weigh the arguments. Here are some of the main ones.

Case For Inflation: Money Supply
Inflation is always and everywhere a monetary phenomenon, the free-market economist Milton Friedman famously argued.

That’s still a widely held view. And those who hold it are pointing to the wave of money created by governments to fight the pandemic –- and predicting that sooner or later it will wash through the whole economy and push prices up.

In many countries, money supply is growing at some of the fastest rates on record. What’s more, unlike a decade ago, when a similar infusion of money never moved much beyond banks’ balance sheets, there are signs this time around that the cash is making its way into the pockets of consumers and companies.

“Today’s policy measures are injecting cash flows that will directly raise the broader measures of money,” Goodhart and Manoj Pradhan of Talking Heads Macro wrote in a postscript to their book “The Great Demographic Reversal,” published this year. The inevitable outcome, as lockdowns ease and recovery ensues, will be “a surge in inflation.”

Case Against: Money Velocity
It’s the use of money, not just its creation, that affects prices. That’s one explanation for subdued inflation since 2008, even as central banks cranked up the printing presses. And the same forces may still be at work.

In the U.S. the “velocity” of money -– the frequency with which it changes hands, as people use it to buy goods and services -– fell off in the 2008 financial crisis, never really recovered, and has collapsed to unprecedented lows now.

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