The global economy is forecast to contract 5% in 2020; yet, paradoxically, a number of investors are worried about inflation since the Federal Reserve and other central banks began flooding the markets with stimulus. At the same time fiscal expenditures have soared to help alleviate the effects of the coronavirus pandemic, while tax revenues have plunged.
In May of this year, the U.S. deficit widened to $424 billion, double what it was in May 2019. The Congressional Budget Office (CBO) estimated that the federal deficit for the first eight months of the fiscal year, which began in October 2019, totaled $1.9 trillion – that’s 157% higher than the same period last year. The CBO estimated the 2020 deficit could reach nearly $3.7 trillion, easily surpassing the previous peak during the last downturn. The deficit, as a percent of GDP, is projected for the year at 18%, the highest level since the last recession.
Even modest inflation can have a deleterious effect on retirees’ savings and fixed income. A 3% inflation rate over 10 years will reduce purchasing power by approximately a third.
In addition to expansive fiscal policy, the Federal Reserve is injecting substantial liquidity into the economy by purchasing bonds. By the end of the year, the Fed is projected to purchase $3.5 trillion in government securities. The Fed’s goal is to provide liquidity to credit markets in times of market stress and to support a market recovery. In the past, large scale government spending and an expansion in the money supply have often led to bouts of inflation that were difficult to tame.