Why is there a threat of general rise in price across the world?
Data from around the world suggest that prices are rising across the world due at different paces and due to varying reasons. Here are a few common threads that connect the global inflation.
Cheap money policy
The large amount of liquidity made available across most economies across the world to revive growth through low interest rates and large government spending through borrowed funds have been reflating the economies. In some cases, the policy is delivering more than desired levels of inflation.
Commodity prices
Economic recovery after a deep slump is creating new demand that is resulting in a rise in commodity prices. Commodity price surges generally occur against the backdrop of a weaker dollar. This allows emerging currencies to strengthen, cushioning the price impact of imported commodities and other goods. Although commodity prices have doubled in the past one year, the emerging market currencies haven’t gained enough to compensate for the price gains resulting in higher inflation.
Liquidity driven super cycle
A synchronised rise in commodity prices are happening across the world, first time since 2008. While demand surge is one side of the story, the excess global liquidity is driving up the commodity prices as the same forces that drove up stock prices during the pandemic.
Food prices
Global food prices rose for the 11th straight month in April to hit a near-seven year high, according to a UN food agency index. Sugar prices soared some 60 per cent year-on-year and cereal 26 per cent as economic reopening spurs demand.
China factor
Markets are waking up to soaring factorygate inflation in China. The transmission from PPI to CPI is not a straight line but there is little doubt the global inflation loop is being reinforced by Chinese manufacturers passing on higher raw material and component costs to overseas clients. China is still central to global inflation dynamics, but this time around, the country is importing inflation from the global economy and is now in the command seat to re-export that inflation abroad in rising prices of manufactured exports that are now in demand in developed markets.