Recently, Brad McMillan, Commonwealth’s chief investment officer, discussed inflation and why he does not see an imminent risk of runaway inflation. Looking at the topic from the demand side of the equilibrium, he argued that demand collapses during a crisis and so does inflation. But, as we all know, there are two sides to any equation. Let’s now assess the supply side of this analysis. Could inflation come from there?

When the pandemic hit in early 2020 and the entire economy hunkered down, demand collapsed. We were not driving to work, going to restaurants, or taking vacations and business trips. Suddenly, there was gasoline at the gas stations with no takers, perishables that restaurants were not buying, and theme parks and malls shut down and then reopened to few visitors. Supply chains started getting disrupted and prices spiked for goods in high demand (think Clorox wipes, toilet paper, and hand sanitizer). With job losses in the millions and no data on how long the pandemic would last, consumers cut spending on nonessentials.

You’ve Got Delivery—a Stimulus Package

The central bank and government sprang into action quickly, having learned their lesson from the great financial crisis. The Fed cut the federal funds rate to nearly zero. With bipartisan support, the government passed the CARES Act in record time. The hope was that these measures would cushion the blow for consumers and businesses, helping them get to the other side of the pandemic. They were also intended to stimulate economic activity.

Now that we’re almost one year into the crisis, the Fed has indicated it will keep rates near zero for the foreseeable future. Our newly elected government is in the process of passing another massive COVID-19 relief bill. With all this money being printed and dropping into the system, the economy is apparently on the road to recovery. But some people are concerned that the vast sums of helicopter money will lead to inflation roaring back. That’s a fair concern. To get to the answer, we need to ask a question. Where did all the 2020 stimulus money go—or not go?

Consumers Didn’t Spend It

In the last half century, the personal savings rate in the U.S. averaged about 8 percent. In 2020, it spiked to as high as 34 percent. More recently, the rate was recorded at 14 percent. So, despite all the government support to promote spending, consumers were in fact saving more. But, if not spending their cash, where were they parking it? Were they simply leaving money in their bank accounts? The data shows that some consumers piled into cash and money market funds and some paid off debts. Others turned to day trading—a very dangerous game. According to a Bloomberg report, at a time when headlines were dominated by a raging virus, a recession, and the fastest-ever bear market, a record $120 trillion of stocks changed hands on U.S. stock exchanges in 2020. That number was up 50 percent from 2019. Retail traders now account for one-fifth of stock-trading volume in the U.S., double their share from a decade ago and behind only market makers and high-frequency traders.

Thus, the demand for real goods and services remained suppressed despite the fiscal and monetary support, but demand for financial assets increased. This scenario was good for our investment portfolios and assets but did not ignite consumer price inflation. No spending means no inflation.

Companies Cut Back on Investments

Banks were incentivized by the low federal funds rate to lend money and promote growth in the real economy. Early in the crisis, bank borrowing did increase as companies drew on their overdraft facilities to prepare for the worst. After the initial rush, however, demand for commercial and industrial loans ebbed. With consumers not buying, businesses had no incentive to borrow funds to buy new equipment or build new buildings. In addition, the businesses whose sales were booming as they catered to consumers’ work-from-home lifestyles were generally capital-light technology companies. Banks tightened lending standards on concerns of an uncertain economic climate and worsening industry-specific problems. Companies did keep paying their dividends for the most part, rewarding shareholders who stuck with them. But, overall, companies weren’t spending. Again, no spending means no inflation.

Zombies Proliferated

When the pandemic hit, the Fed and the U.S. Treasury committed trillions of dollars to corporate rescue efforts. These programs gave direct loans to leveraged companies under the Main Street Lending Program. They also included purchases of “fallen angels”—bonds that were demoted from investment-grade to junk status. This scenario set the stage for a proliferation of “zombie” corporations, or companies on life support, courtesy of the government. As of the end of 2020, nearly one-quarter of the large-cap companies and half of the small- and mid-cap companies in the U.S. were zombie firms. That is twice the long-term historical average! When zombies or distressed firms are granted a lease of life, they create excess capacity and suppress prices. This leads to asset-price inflation but not to consumer inflation. As long as zombie companies keep draining away demand at lower prices, we won’t see rising inflation.

What Will Raise Inflation?

Although the government and the Fed have pumped plenty of money supply into the economy, inflation has remained benign. For inflation to rise meaningfully, we need consumer spending to rebound, companies to start investing in new equipment and buildings to meet the rising demand, and zombie corporations to be replaced by companies that will grow instead of just stomp along. All of these outcomes are likely, but they have not happened yet. Until they do, we won’t see increased inflation.

Is inflation coming? At some point, yes. We know what generates inflation, and we will be watching for it. Until then, we do not expect a wildfire in inflation land.

Editor’s Note: The  original version of this article appeared on the Independent Market Observer.