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Could a ‘safety premium’ boost inflation?

Franklin Templeton asks how much more people might be willing to pay for peace of mind.

Could a ‘safety premium’ boost inflation?

‘Everything has a price’ Franklin Templeton’s fixed income CIO Sonal Desai noted in a new paper released by the asset manager this week. So what is the potential price that consumers could attach to their own safety as economies open up?

‘In several industries, resuming activity while limiting contagion risk implies extra costs or reducing the number of customers,’ said Desai. ‘The extent to which these costs will be passed on to consumers in higher prices will depend – among other things – on the extent to which people are willing to pay for the extra safety.’

To test this, Franklin Templeton surveyed consumers on how much extra they would be willing to pay to secure an empty seat next to them on an aeroplane.

The firm asked: ‘Assume you are purchasing a plane ticket for personal travel for $500. Would you be willing to pay the following extra amounts to ensure an empty seat next to you?’

Desai noted that the results were ‘striking’:

‘About half of our respondents would be willing to pay up to $100 more, a 20% price increase,’ she said. ‘Between a quarter and a third of respondents would be willing to pay up to an additional $150, a 30% price increase. Between one in ten and one in three of our respondents would be willing to pay an additional $250, a full 50% price increase.’

This has implications for inflation.

‘A prolonged recession would depress incomes and demand, but a combination of bankruptcies and safety requirements might cause a corresponding cut in supply,’ said Desai. ‘If those who can afford it are willing to pay significantly more for extra perceived safety, we might see a significant rise in inflation down the line.

‘Policymakers should be mindful of this for several reasons,’ Desai added. ‘One being that it might exacerbate the rise of inequality from a pandemic that already discriminates against the most vulnerable workers (concentrated in the hardest-hit service sectors) and disadvantaged children (through prolonged school closures). In our view, investors should also start thinking about the impact of inflation reawakening from a decades-long slumber.’

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