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The COVID-19 crisis with rising unemployment and excessive stocks has led to very low headline and core inflation in 2020, around 0%. This low inflation, together with the prospect of lower potential growth after the crisis than before, has revived the debate on the risk of deflation but economists at Natixis do not believe there is a risk of deflation.

Key quotes

“Financial markets expect inflation in the United States and the Eurozone to normalise in 2021, which is consistent with: the recovery in activity and the reduction in stocks; the upswing in commodity prices from the lows in 2020; the fact that companies will take advantage of the improvement in activity to pass part of their cost increases on to their prices. For the same reasons, inflation picked up again in 2010-2011 in the aftermath of the subprime crisis.”

“It is likely that potential growth will be lower after the COVID-19 crisis than it was before given the loss of human capital due to the rise in unemployment and the lasting crisis in certain economic sectors and the decline in investment and therefore in available capital. However, monetary policies will remain very expansionary and real interest rates will remain persistently negative in the US and the Eurozone and close to zero in Japan. This means that real interest rates (both short-term and long-term) will remain permanently lower than real potential growth (and even lower than real growth from 2021 onwards).”