May 26, 2020, 12:02 p.m. EDT

Supply-side inflation shock or demand-led deflation? ECB’s current and former chief economists weigh in

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By Steve Goldstein, MarketWatch


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European Central Bank Chief Economist Philip Lane speaks during a conference at the Fortune Global Forum event last November in Paris.

The chief economist of the European Central Bank on Tuesday said falling prices rather than rising ones are more likely to result from the coronavirus pandemic that has been weighing on the global economy.

“I can imagine many firms that do face more costs,” said Philip Lane, speaking to an Institute of International Finance conference. “Of course, simultaneously they face a much smaller base as the demand levels come down.”

He said compressed profit margins are much more likely than price increases. “We don’t rule out seeing individual sectors having price increases. We’re sufficiently humble about the longer-term inflation outlook,” he said. “But mostly I think this is a negative period for the inflation path.”

At a separate IIF panel, former ECB chief economist Peter Praet agreed. He said it will take two years for GDP to reach prepandemic levels.

Now a senior fellow at the Solvay School of Economics and Management at the Université Libre de Bruxelles, Praet said households will be very careful on spending as he referenced the riots in France. “And so the political and social tensions on who will foot the bill is going to be there.”

“My conclusion is in the relatively short to medium term, one to two years, the deflationary pressures will dominate,” Praet said.

Steve Goldstein is MarketWatch markets editor for Europe. Follow him on Twitter: @MKTWgoldstein.

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