UPDATE: Will rising populism stoke inflation?
Big government spending this spring shows 'the understanding by politicians that spending is popular, especially in times of crisis'
Ever since the 2008 financial crisis, policymakers have fretted that inflation is too low (https://www.marketwatch.com/story/inflation-isnt-coming-and-the-feds-job-is-about-to-get-a-lot-harder-economist-says-2020-01-31). Tepid demand, a reluctance for capital spending, stagnant wage growth, and an aging population have kept a tight lid on prices (https://www.marketwatch.com/story/consumer-spending-climbs-14-in-september-to-cap-off-strong-third-quarter-2020-10-30?mod=mw_latestnews), and raised fears about the kind of deflation that's gripped Japan for decades.
More recently though some analysts are concerned about inflation heating up than cooling down. After all, any deviation from the lower-for-longer regime that's characterized the last decade and a half may take markets by surprise, denting future corporate earnings and eroding the value of already-issued bonds.
"The risk that inflation accelerates quickly is greater than the market appreciates," wrote analysts at BCA Research in a note to be published Sunday. The culprit? "Mounting populism has created a structural tailwind behind inflation."
Populism isn't a new trend, they note. It's been percolating over the past 40 years, in response to "soaring" income and wealth inequalities, especially in the US and the UK. Both countries also face declining social mobility.
And it's not the first time they've taken note of its impact, on both society and the economy.
See: Strategist who predicted the U.S. would 'see a revolt of some kind by the 2020 election' says U.S. in 'danger zone' and stocks will suffer (https://www.marketwatch.com/story/strategist-who-predicted-the-us-would-see-a-revolt-of-some-kind-by-the-2020-election-says-us-in-danger-zone-and-stocks-will-suffer-2020-06-08)
"Brexit and the election of President Trump both fit this pattern because they represent the repudiation of the prevalent neoliberal discourse that pushed toward more globalization, more immigration and more deregulation," they write in the Nov. 1 report. "Moreover, voters in the US and the US increasingly doubt the benefits of free trade."
At the same time, many voters are more "open to" government involvement in the economy, they say, and there's been an increase in the number of people embracing socialism.
"Politicians who want to access or remain in power must cater to voter preferences. Hence, when compared with the Great Financial Crisis, the swift fiscal policy easing that accompanied the COVID-19 recession illustrates the understanding by politicians that spending is popular, especially in times of crisis."
Spending may be popular, but when it's done while the economy is at full employment, it will boost demand, which can be inflationary. What's more, populist regulations will tend to mitigate competition in the economy in favor of protecting workers, and to dial back free trade, which will raise prices of goods.
In addition, if the push toward populism manifests itself in higher taxes on higher-income households, it may lessen the tax burden on the middle class, which could stoke more spending. As the BCA analysts describe it, "Re-shuffling the composition of national income toward the middle class will boost demand and puts upward pressure on consumer prices.'
The BCA analysts also argue that a populist electorate won't just influence fiscal policy, but monetary policy as well. "Central banks are not immune to the preference of the median voter," they write, and the Federal Reserve's policies "will likely become structurally looser in response to indirect voter pressure."
Read next: Fool me twice? For businesses and consumers, coronavirus is the financial crisis all over again (https://www.marketwatch.com/story/fool-me-twice-for-businesses-and-consumers-coronavirus-is-the-financial-crisis-all-over-again-2020-04-16)
-Andrea Riquier; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
October 30, 2020 13:08 ET (17:08 GMT)
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