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FERI Economics Update May 2020 - What Are the Consequences of the Corona Pandemic for Inflation?

Bad Homburg, 05/04/2020
by FERI, Axel D. Angermann
  • Deflationary effects predominate in the short term
  • Inflation is likely to be only slightly above 1 percent this year
  • Demography, digitisation and globalisation as long-term price dampers

One of the currently much discussed consequences of the corona pandemic is its impact on inflation. In the short term, the answer is clear: the massive slump in the economy and the drastic decline in investment and consumer demand have a deflationary effect. The inflation rate in Germany in April was below the 1 percent mark, although this was also due to the significant drop in energy costs. But also the core inflation, which does not take into account short-term fluctuations in energy and food prices, fell to 1.2 percent in April. On average, inflation is unlikely to exceed 1 percent over the year, and a significant increase in consumer prices is also unlikely next year due to the ongoing effects of the corona crisis on the economy.

Long-term Consequences of Expansive Monetary Policy Unclear

However, it is less clear how the crisis will affect price stability in the long term. The renewed massive flood of money as a result of the extensive government aid programmes suggests that there will be a significant surge in inflation. It is to be expected that the central banks will continue to supply the economy with ample liquidity for a long time to come. Even if inflation were to rise again one day, it is unlikely that the central banks would switch to a more restrictive course, especially since higher inflation rates make it easier for governments to service their exorbitant debts. In the long term, the fact that companies will ensure to be more robust overall should also have a price-increasing effect. If they diversify their supply chains, increase their inventories and make location decisions less dependent on efficiency considerations, this will tend to result in higher costs. If demand picks up again, companies have a good chance of passing on these cost increases in their prices.

Global Megatrends Have a Dampening Effect on Inflation

On the other hand, however, there are structural factors that continue to have a dampening effect on inflation. These include, above all, demographic change, which will become increasingly noticeable in the coming years and lead to a significant decline in potential growth. The second key factor is digitization, which is likely to receive an additional boost from the Corona crisis. The resulting productivity gains will also limit the potential for inflation. The third factor is global competition: Even though world trade is likely to grow less rapidly than the global economic output over the next few years, cross-border competition will still basically remain in place. This will continue to have a price-dampening effect.

Overall, the interplay of the various factors suggests that inflation will rise moderately in the current decade. In the Euro zone, the persistent shortfall of close to 2 percent below the inflation target could soon be a thing of the past. However, inflation rates above the 5 percent mark
are not in sight for the time being.


About FERI

Founded in 1987 and headquartered in Bad Homburg, Germany, the FERI Group has developed into one of the leading investment houses in the German-speaking area. FERI offers tailor-made solutions for institutional investors, family assets and trusts in the following areas:

The FERI Cognitive Finance Institute was formed in 2016. It is the strategic research centre and creative think tank of the FERI Group. The Institute focuses on innovative analyses and the development of methods for long-term oriented economic and capital market research. 

FERI and MLP currently have assets of EUR 39.2 billion under management. A total of EUR 8.5 billion of these assets are alternative investments. The FERI Group is headquartered in Bad Homburg and has offices in Dusseldorf, Hamburg, Luxembourg, Munich, Vienna and Zurich.


About Axel D. Angermann

As Chief Economist of the FERI Group, Axel D. Angermann analyses the economic and structural developments of all markets that are important for asset allocation. This data forms the basis for the strategic orientation of FERI's asset investments.

Angermann has been responsible for the analyses and forecasts prepared by FERI for the overall economy and individual sectors since 2008. He joined the company in 2002 as an industry analyst. His professional career began at the Max Planck Institute for Economics and the German Chemical Industry Association. Angermann studied economics in Berlin and Bayreuth.



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Katja Liese

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Corporate Strategy, Marketing and Communications

T +49 (0) 6172 916-3192

F +49 (0) 6172 916-1192

presse@feri.de

FERI AG

Rathausplatz 8-10

D-61348 Bad Homburg

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Katja Liese
Member of the Management Board
Corporate Strategy, Marketing and Communications

T +49 (0) 6172 916-3192
F +49 (0) 6172 916-1192
presse@feri.de

FERI AG
Rathausplatz 8-10
D-61348 Bad Homburg

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Katja Liese
Member of the Management Board
Corporate Strategy, Marketing and Communications

T +49 (0) 6172 916-3192
F +49 (0) 6172 916-1192
presse@feri.de

FERI AG
Rathausplatz 8-10
D-61348 Bad Homburg

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