The COVID-19 recession has put more people out of work, and faster, than the downturn which followed the financial crash of 2008.

Yet there has been optimistic talk of a boom to follow, like the roaring 1920s a century earlier.

Gloomier prognosticators foresee a continuation of poor economic performance, with a return to inflation thrown in.

Forecasting the macro economy is difficult and the track record is poor.

Challenged about this in the 1980s, the late Milton Friedman explained: "Economists make forecasts, not because they know, but because they are asked."

Inflationary surge

They are asked constantly about the likelihood of an inflationary surge whenever the COVID-19 downturn recedes. They are in two minds, as usual.

One group expects that central banks will reassert control and tighten policy enough to keep inflation below the target level, around 2% per annum in most countries.

Others feel that governments are enjoying the absence of borrowing constraints (central banks have been gobbling up government debt) and will keep policy loose for longer.

Economists make forecasts, not because they know, but because they are asked

Since the lockdowns have seen an increase in the household savings rate, there should be something of a consumer boom as restrictions ease.

There is pent-up demand for travel, hospitality and for various categories of consumer goods.

Even those whose incomes have been squeezed and who have not accumulated involuntary saving will likely be returning to work and better able to finance consumption.

Business firms will be pushing ahead with investment projects deferred during lockdowns and, barring a new wave of the virus, there should be no weakness in aggregate demand.

If governments maintain fiscal stimulus at current high levels, the result could be inflationary pressure from the spending side, notably in the US, where the Biden package is larger than seemed likely a few months back.

Monetary stimulus in Europe will not be withdrawn early, in tune with economic recovery – the European Central Bank (ECB) has been making dovish noises recently.

Upward drift in bonds

There has already been a drift upwards in bond market interest rates in the US, where the most recent year-on-year CPI inflation number came in at 4.2%.

Markets fear that the central bank - the Federal Reserve - will raise official interest rates if inflation takes off and they would certainly do so if they thought the uptick was likely to persist.

But there are once-off factors at play, including energy prices, and the Fed is not alarmed.

In the eurozone, there is no evidence yet of an inflation rebound, and the figures have been stubbornly below the 2% target for a decade.

Here in Ireland, there has been hardly any inflation for 10 years now, an average of only about 0.5% per annum.

In the eurozone, there has been a persistent failure to keep the inflation rate close to the 2% target and the ECB has acknowledged that failure

In addition to price pressures as demand recovers, there is evidence of cost increases arising from the business response to COVID-19.

Supply chains have been disrupted internationally and operating costs have risen because of social distancing and resultant extra space requirements.

Some employers are reporting problems in recruiting or re-hiring staff. Many have returned to eastern Europe and there could be wage inflation in sectors such as construction if shortages emerge.

Inflation target

In the eurozone, there has been a persistent failure to keep the inflation rate close to the 2% target and the ECB has acknowledged that failure.

But nobody knows if there is a greater political tolerance for higher inflation in Europe than was the case some years back.

For a country with heavy international debts, or for over-borrowed firms and households, low inflation is not entirely welcome.

The perfect combination would be low interest cost on the debt and inflation running above the cost of borrowing, delivering negative real interest rates.

This is the formula that eroded the huge debts following World War II during the 1950s and 1960s and the immediate post-COVID-19 years could see a repetition.

Some American economists, including the Clinton-era treasury secretary Larry Summers, think that this process is already under way in the US.

In the past, the ECB has quickly tightened up whenever that prospect emerged and could do so again

The outcome could be different in the eurozone. Ireland does not have an independent currency and both inflation and interest rates will follow the pattern arising from ECB policy.

For now, the policy is to continue with easy monetary conditions and there will be no sudden spike in interest rates.

But what if inflation moves up to the 2% target? In the past, the ECB has quickly tightened up whenever that prospect emerged and could do so again.

It will all depend on attitudes in Germany, whose influence has prevailed up to now, and where inflation tolerance has always been low.

The general election there is just four months away on 26 September and, while there could be a change of regime according to the opinion polls, all the parties remain as committed as ever to sound money.