WILL INFLATION DERAIL PANDEMIC RECOVERY?
Supply chain disruptions, rise in commodity prices and cheap fiscal policies are fuelling a sharp rise in factory gate inflation
Is post-Covid-19 global economic recovery going to be dampened by a big surge in inflation? Indications from both advanced and emerging economies point to rising inflation caused by input costs translating into rinsing factory gate inflation that could eventually lead to a flare-up in consumer prices. The price surge is also fuelled by low interest rate monetary policies and fiscal expansion by governments around the world to revive Covid-hit economic growth.
Recent data from China showed May’s factory gate prices rose at their fastest annual pace in over 12 years due to surging commodity prices and supply chain disruptions. The country’s producer price index (PPI) for May increased 9 per cent, according to the National Bureau of Statistics. China’s producer price index climbed by the most since 2017 in May, with everything from big-ticket items like oil and metal to components such as screws and cardboard shooting up.
Higher PPI equals higher CPI?
The PPI measures price changes from the perspective of the seller and differs from the consumer price index (CPI) which measures price changes from the perspective of the buyer. The transmission of producer price inflation to consumer price inflation is not always a straight line. There is always a lag between the two.
China’s PPI is yet to feed through to consumer inflation. Consumer prices rose 1.3 per cent in May — the biggest year-onyear increase in eight months — but came in below expectations for a 1.6 per cent gain. Consumer inflation remained well below the government’s official target of around 3 per cent.
Export of inflation
Looking ahead, the worry is that if China’s PPI hovers at elevated levels for an extended period of time, which would create economic headaches as downstream firms fail to absorb higher costs. There are already some signs Chinese factories, facing tight margins, are passing on higher raw material costs to overseas clients, which could reinforce the global inflation loop. A steady surge in manufacturing inflation in China could simply mean, the country, literally global hub of manufacturing, could emerge a wholesale exporter of inflation with higher prices on manufactured goods.
Is US forced to import inflation?
The US economy’s rebound from the pandemic is driving the biggest surge in inflation in nearly 13 years, with consumer prices rising in May by 5 per cent from a year ago. The rising prices of Chinese manufactured goods have a significant impact on US consumer prices. A US gauge of prices for imported goods from China rose 1.8 per cent at the close of the first quarter of 2021 from a year ago, the biggest gain in almost nine years.
In May, core inflation in US jumped from 3 per cent to 3.8 per cent, reaching levels last seen in 1992, and running well above the Federal Reserve’s 2 per cent target.
America’s trade balance in goods hit an alltime low in 2021 and imports from China alone
Inflation in emerging markets has been ticking up in recent months, but largely remained within tolerable limits.
comprise about a fifth of all US consumption of manufactured goods. Given that China is the leading supplier for every import category for the United States, price rise in China is certain to reflect in US consumer prices.
Is recent US inflation spike transitory?
“The bulk of May’s price rises continue to be driven by temporary shortages of goods and reopening demand for services — though rent increases were also firmer last month. The Fed is still likely to see inflation cooling again after the summer and thus refrain from tapering its quantitative easing until early 2022 when the labour market has recovered further,” said Mansour Mohiuddin, Chief Economist, Bank of Singapore. The Fed and the financial markets, at least for now, want to see the recent sharp increase in prices as ‘cyclical’.
Price trends in advanced economies
Recent data suggest prices are rising at different rates across the 38 countries of the OECD, which together account for about 60 per cent of the global economy. In the United States, annual inflation increased to 4.2 per cent in April from 2.6 per cent in March, while Canada’s rate accelerated to 3.4 per cent from 2.2 per cent. Europe saw more modest increases in April, with inflation increasing to 1.6 per cent in the United Kingdom, 2 per cent in Germany, 1.2 per cent in France and 1.1 per cent in Italy.
Although the OECD agrees that inflation is edging up, in tandem with the Fed’s view, it expects the jump in inflation to fade by the end of the year as supply chains disrupted by the pandemic get back up to speed and production capacity returns to normal.
What is the emerging markets story
Inflation in emerging markets has been ticking up in recent months, but largely remained within tolerable limits, as many of these economies are yet to make substantial recovery from the pandemic shock.
Unlike the US Federal Reserve, which has so far dismissed inflation as transitory, emerging market policymakers do not have that luxury of waiting. Many have kicked off interest rate cycles even before their economies recover from the pandemic devastation.