Have you ever slept on an air mattress? If yes, you probably noticed that the mattress deflated overnight. It lost air, you couldn’t sleep, so you had to get up and reflate the mattress in the middle of the night, waking up all around.
This is what reflation is about. It means the process of restoring. In macroeconomics, we focus not on mattresses or balloons, but on the price level, but the idea is the same. Reflation is inflation deliberately undertaken to relieve an episode of preceding and bring inflation back to its long-run historical average This is why it usually occurs after an or a recession. Reflation policies include increasing the , lowering , etc. The , and the implemented in the aftermath of the are the best examples of reflation policies.
Reflation and Gold
One could argue that as reflation is restoring inflation, while, reflation should be positive for the gold prices. However, the relationship between reflation and gold is more complex. The key issue here is that gold shines during periods of high and rising inflation, but it is not actually not a hedge against low and stable inflation rates. So, given that reflation is a policy aiming to merely restore inflation to its long-term average level, or to the central banks’ target of 2 percent, it should not be very supportive for the gold prices.
Let’s take a look at the chart below. Although gold soared during the initial phase of the global, it peaked in 2011, despite all the reflation efforts of the . As inflation expectations collapsed in 2013, gold entered a .
Chart 1: Gold prices (yellow line, right axis, London P.M. Fix, $) and the inflation rate (red line, left axis, CPI, annual % change) from January 1971 to July 2019.
It suggests that reflation does not have to boost gold prices. It would take a very successful reflationary effort that releases the inflationary genie from the bottle to do the trick.
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