Inflation or deflation in 2021?

We look at the situations in the United States and the euro zone. The question of the risk of deflation is once again being raised because of the very low inflation in 2020. Given the downturn in activity, the rise in unemployment and inventories, and the fall in commodity prices, it is normal for inflation to be very low in 2020. Unit labour costs are also rising sharply in 2020 due to the fall in productivity, and this is not being passed on to prices, resulting in a sharp fall in profit margins. But inflation is likely to normalise in 2021, which is what financial markets actually expect, and deflation is unlikely due to: The recovery in activity and the fall in inventories; The upswing in commodity prices; Companies' determination to improve their profit margins; The fact that the new health measures will be maintained, at least for part of the year. Central banks have protected themselves against this normalisation of inflation by conveying the message that they can accept above-target inflation , which will compensate for the period of below-target inflation (this is "average inflation targeting"). Financial markets have fully understood this new central bank behaviour, which explains why the expected rise in inflation is not having any impact on long-term interest rates.