Will inflation rise in 2021?
By Michael Pinson, News Editor
22 Jan 2021
Inflation is set to be a key driver for gold prices in 2021 and beyond, and could help propel gold to a new all-time high. The Covid-19 outbreak saw inflation fall to near-zero in 2020, but the economic response could see inflation rise, and rise significantly in the months ahead, pushing up demand for inflation hedges like gold.
Despite the spread of Covid-19, and unprecedented levels of fiscal stimulus (money-printing) that was released to fund the various financial support programs introduced by governments, inflation remained low in 2020, as seen in the chart below.
In the UK, inflation fell from 1.8% in January, to a low of 0.2% in August. While certain items like food have seen prices rise as panic buying and reduced production saw some supply shortages, the majority of indices saw prices fall over the course of the year.
Retailers slashed prices on clothing and other goods in a bid to attract online shoppers following the closure of high street stores. Transport saw prices slump as international travel dried up, with oil prices in particular reflecting the drop in travel. This deflationary pressure kept inflation low despite the billions added to the economy by the Bank of England.
With trillions being printed globally however, many analysts believe it is only a matter of time before inflation begins to rise, and that it could be significant when it happens. As vaccination hopefully brings the pandemic under control and restrictions ease, the pent-up demand of consumer spending is expected to finally catch up with fiscal stimulus, and cause prices to rise.
As seen in December’s figure for the UK, the slight easing of restrictions in the weeks leading up to Christmas were enough to see inflation double from 0.3% in November to 0.6%. As more people are vaccinated, demand for the beleaguered service industry will return; with ticket prices, restaurant bills and more rising as a result. Businesses eager to capitalise on the returning demand after a year or more of little to no trading, will almost certainly take the opportunity to raise prices, and may need to in order to manage supply that has likely been reduced during the pandemic.
US experts believe inflation could rise above the Federal Reserve’s target of 2% by around April of this year, but that it may not stay that high for long. Although pent-up demand will drive an initial spending spree for some, high unemployment is not expected to suddenly disappear and could diminish medium term spending. They also note that those sectors that have gone up during pandemic – tech stocks like Netflix for example – will come back down as people return to more outdoor recreation and travel, reverting some current inflation trends.
The OECD also has a similar forecast for the UK, with inflation rising to 1.8% in Q2 2021 before falling back slightly and then slowly rising again as the recovery continues, climbing back up to 1.8% towards the end of 2022. The UK could also face additional inflationary pressure from Brexit, with the first weeks of the new trade status proving disruptive for many business and customers, and could result in price rises in response.
Any signs of a prolonged rise in inflation will likely see the gold price also begin to rise as investors turn away from devaluing money in the bank to the traditional safe haven. The slow nature of the expected recovery however could see inflation held back by unemployment, and this is forming the basis for many gold price forecasts in 2021.