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Inflation or Deflation: What Will We See in the Post-COVID World?

March 24, 2021

post covid economic recovery

Many analysts believe we will enter an inflationary period, but some predict the inverse

A return to normalcy is drawing closer with news that the United States could distribute up to 500 million vaccine doses by the end of June. This number would mean there’s enough product on the market to vaccinate the country’s entire adult population, potentially ending the pandemic.

From there, pockets of virus infections could pop up in schools or within the unvaccinated population. Still, the numbers would be far lower, and hospitals would certainly have the capacity to handle these patients. 

The result should be a significant reopening of businesses around the country—and a potential boom. But public debt is at record levels, and low interest rates may rise. What could all this mean for the economy?

There are arguments suggesting that we could experience a period of inflation, while a few analysts posit we might even be in store for deflation. Here’s a look at both of these possibilities, along with what they might mean for the commercial real estate industry.

Why we could see inflation

The main argument in favor of inflation in the near future involves the influence of debt and quantitative easing (QE) on the economy. This process injects money into the marketplace to stimulate spending. Those who believe inflation is on the horizon suggest that QE almost certainly leads to inflation, particularly affecting the stock and real estate markets. 

Another reason for potential inflation is lower interest rates. Money is incredibly inexpensive to borrow right now, typically leading to more of it making its way into the economy. However, as businesses spend more of this borrowed money, it creates a tower of debt. (The same, of course, is true for the federal government.)

If repaying this debt becomes too much of a burden, the system may be severely strained. At this point, inflation is likely to follow because the only thing that reduces the debt burden at the government level is the decreasing value of money.

This theory on inflation may take years to manifest. But there is also a possibility we could see it starting to take hold in the early days of the post-pandemic world

Will people be so happy to return to normal that they frequent restaurants and buy items they can’t afford?

How quickly can businesses return to normal, and can they repay the loans they’ve received?

Will the government debt spiral have premature consequences?

The argument for deflation

Despite many concerns about inflation, other economists feel that the COVID recovery process won’t increase inflationary pressures for a couple of reasons. 

First, there could be lower consumer demand for goods and services than expected because people simply don’t have the money due to unemployment. Some individuals could be reluctant to return to normal, too, until there’s more data supporting the vaccine’s efficacy. 

In this situation, lower consumer demand would offset the inflationary boost of an increased money supply. As a result, dollars won’t change hands at extreme accelerating rates, and there might not be significant inflation. There could even be deflation if spending drops far below expectations as we move into the summer months.

Second, even if the economy does recover rapidly and consumer spending increases right away, a good proportion of businesses will remain in a recovery period for the remainder of the year. These entities may not have to borrow as much, limiting their new debt while using the influx of consumer cash to pay down their existing debt. 

These arguments suggest an increase in available cash will go toward recovery rather than factors that drive inflation. An increase in consumer spending may also decrease the reliance on borrowed money moving forward.

What this might mean for CRE investment

Commercial real estate investors will want to keep a keen eye on this situation. Lower than average interest rates can create prime borrowing opportunities on available properties, but they’re only worth an investment if economic recovery leads to demand for the specific spaces.

Questions about whether businesses will recover rapidly and expand or stay in a holding pattern for the rest of 2021 remain, so monitoring developments is essential.

It’s also worth noting that income-generating CRE is a reliable hedge against inflation because rental prices increase with inflation. As a result, investors don’t necessarily have to worry about the devaluation of money outpacing their returns.

Monitoring or expanding your real estate portfolio during this recovery period calls for significant due diligence, as recovery will likely be different all over the country. Morris Southeast Group can help you keep an eye on the post-COVID environment and determine whether a specific investment makes sense.

To learn more, contact Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

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