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The Coronavirus Is Neither Inflationary Nor Deflationary

Harrison Schwartz profile picture
Harrison Schwartz


  • COVID-19 has seen an immediate deflationary shock, but growing supply shortages spell a problem.
  • Unemployment and PPP stimulus have kept wages from declining, while there are fewer places to spend money, resulting in higher savings rates.
  • With too much money chasing fewer goods, it is likely that "grocery store inflation" continues to increase, while "non-necessity" goods see much lower prices.
  • Unprecedented Federal Reserve stimulus could easily cause inflation to get out of hand.
  • Inflation-indexed Treasury bonds are likely one of the few lower-risk places to put money.
  • Looking for a helping hand in the market? Members of Core-Satellite Dossier get exclusive ideas and guidance to navigate any climate. Get started today »

There has been a growing debate regarding whether COVID-19 (and its lasting economic consequences) will promote inflation or deflation. Traditionally, recessions are deflationary, as they cause demand to decline while supply is unchanged. However, this recession is far from traditional in that both supply and demand are in decline, resulting in an unclear price impact.

Indeed, it is very important for investors to have a sense of the CPI's direction. Long-term bonds are usually a popular recession hedge, since they rise with deflation. Long-term Treasuries, such as those in TLT, have a negative correlation to stocks not due to direct causality but because downturns usually promote deflation, which is beneficial for bonds. If there were a stagflationary recession, both stocks and bonds would likely decline, which would have a jarring consequence on most investors' portfolios (not to mention the struggling pension system).

Even more, inflation is perhaps the most important factor when it comes to the performance of certain equity sectors over others. Utilities, consumer staples, technology, and REITs generally struggle to raise prices with CPI, but must still raise wages with it. Thus, the value of their future cash flows rises with deflation and falls with inflation. The ongoing period of low inflation has been a major factor supporting these sectors.

On the other hand, commodity producers and manufacturers generally see sales prices rise at a faster rate than wages during higher inflation, which benefits those sectors. As an example, the past decade's low inflation has brought commodity prices so low that many commodity producers cannot make a profit (i.e., energy, base metals mining).

So, is the ongoing crisis promoting inflation or deflation? The answer may not be so simple.

Inflation is Not Ubiquitous

In March, the prices of all goods fell by an average of 0.4% (using CPI weights), however, there was

ChartData by YCharts

ChartData by YCharts

ChartData by YCharts

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This article was written by

Harrison Schwartz profile picture
Harrison is a financial analyst who has been writing on Seeking Alpha since 2018 and has closely followed the market for over a decade. He has professional experience in the private equity, real estate, and economic research industry. Harrison also has an academic background in financial econometrics, economic forecasting, and global monetary economics.

Analyst’s Disclosure: I am/we are short TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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