Mr Smeaton says he believes there is a chance that inflation could rise because: “The supply of money has increased, with government spending having gone up, and central banks printing money to pay for it, and that money has to go somewhere.”
But he is positioning portfolios on the basis that inflation will not rise significantly from here, while Mr Bartholomew believes the drop in demand will be so severe that deflation, rather than inflation, will be the problem.
Simon Edelsten, who runs the Mid Wynd investment trust is anticipating very low bond yields and says the deflationary impact of this crash may take a while to register.
Mr Edelsten adds: "Some elements of the CPI will be hard to assess for a while, such as the price of cars when nobody is buying.
"There is a risk that inflation takes off sharply in the longer term. This is always a prospect when governments spend large amounts and take the risk that savers will worry their currency is being diluted. We have therefore invested in a number of gold mines which would benefit (and already have benefitted) from a rising gold price.”
Fiscal Drag
The stimulus programme undertaken by the UK government, most notably the furlough jobs scheme, means government debt will rise.
The implications of the higher borrowing are two fold.
The first is, government resources being deployed today to fight the pandemic are not being used to improve the long term growth rate of the economy, harming the long-term potential of the economy.
The second problem is that the cash borrowed today has to be repaid, with the future interest payments taking cash out of the economy, as it will have to come from cuts to spending, or higher taxes.
Mr Smith says that with borrowing in the private sector likely to be muted, “it makes sense” for governments to borrow.
He noted that with central banks buying huge quantities of the debt, the yield on the government debt is unlikely to rise much from here, and if it does, central banks will intervene by buying more of the debt to push the yield down.
Chris Iggo, chief investment officer for core investments at Axa Investment Management says he believes the debt will be dealt with in the same way it has been dealt with since the global financial crisis, with interest rates kept low.
Mr Iggo says: “A relatively simplistic view is that high debt levels are dealt with either by boosting growth (not easy), generating primary budget surpluses (austerity) to pay down debt (not politically popular after it led to the rise in populism in the last decade), generating inflation (again, not easy) or providing some kind of debt relief.
