Deutsche Bank, Germany's largest lender, said the U.S. may expect one of the worst inflation periods in history, arguing that higher government spending and soft monetary policy could combine to create conditions similar to previous episodes of the 1940s and 1970s.

 

According to a report released Monday, the pressure is compounded by the roughly $2 trillion in "excess savings" that consumers have accumulated over the past year, when many businesses have been closed and travel has mostly closed.

 

"Consumers will definitely spend at least some of their savings when the economy reopens," wrote Deutsche Bank chief economist David Falkerts-Landau, along with Peter Hooper, head of global economic research, and Jim Reed, head of case studies. a very real spectre of inflation driven by consumers."

 

Inflation is closely watched by investors in cryptocurrency, who consider bitcoin as a means of protection against the depreciation of the dollar.

 

But bitcoin has also sometimes traded in sync with risky traditional assets such as equities, and Deutsche Bank's authors have warned that when inflation eventually emerges, the Fed may have to react strongly, which could "cause a significant recession and trigger a chain of financial disasters around the world."

 

The warning stands in stark contrast to the repeated assurances by Federal Reserve Chairman Jerome Powell that higher inflation is likely to be "temporary" and will stabilize over time as the economy recovers from the recession caused by last year's pandemic.

 

"The lack of preparation for the return of inflation is a cause for concern. Even if some inflation is temporary today, it can affect expectations as it did in the 1970s," the report says. "Even if they are implemented for only a few months, these expectations can be difficult to contain with such a strong stimulus."

• One signal to be drawn to is the output gap, which measures the imbalance between supply and demand as a percentage of the economy's gross domestic product.
• Deutsche Bank expects the U.S. output gap to exceed 2 percent, the highest in more than two decades as demand exceeds supply, leading to higher prices.
• After the 2008 financial crisis, "the amount of U.S. stimulus was insufficient to close the output gap, and the recovery was unnecessarily slow."
• But the widening output gap in the 1960s preceded high inflation in the 1970s, which was exacerbated by a series of oil price spikes.

 

Deutsche Bank estimates that legislative stimulus packages amounted to more than $5 trillion, or more than 25% of gross domestic product. The U.S. federal budget deficit is likely to be between 14% and 15% of GDP in both 2020 and 2021, up from about 10% in 2009.

 

During World War II, economists said, the U.S. deficit remained between 15% and 30 percent for four years.

 

"While there are many significant differences between the pandemic and world war II, we should note that annual inflation was 8.4% in 1946, 14.6% in 1947 and 7.7% in 1948 after the economy returned to normal and deferred demand was released," the report says.

 

The current political climate means that job growth may be a higher priority in the coming years than containing inflation.

 

Unlike in the early 1980s, when then-President Ronald Reagan supported Fed Chairman Paul Volcker, who "put the economy to the test to suppress inflation, today this problem is seen as much less important than unemployment and broader goals of achieving greater equality in income and wealth," the report said.

 

"The Fed's retreat from pre-emptive action under the new policy is the most important factor that increases the risk that it will be far behind schedule and late to effectively deal with the problem of inflation without major disruptions," the authors write.