Limited Prospects for a Quick Resolution to Global Inflation: Analysts
The question of how long current high global inflation lasts is being widely debated. However, evidence suggests that the “transitory” argument of the past six months is gradually becoming less persuasive as the bottlenecks related to supply chain disruptions seem to be more persistent than previously thought.
It may be better to describe the current situation as a “supply shock” rise in inflation with limited prospects for fast resolution.
Energy prices have increased at a rapid pace to a monthly average of Brent oil crude of $84/b in October (the highest since October 2014) and $5.5/MMbtu for U.S. Henry Hub (the highest since February 2014).
The current market conditions and the short-term outlook for oil and natural gas reflect the interplay of production, stocks, and consumption. OPEC + has recently agreed to continue with a limited output increase (400,000 barrels per day each month) through the end of 2022, and we now assume that Brent oil prices will remain near their recent levels of $81/b.
Food prices have also increased to their highest levels since 2013 (Exhibit 1). Taken together, these two components contributed about 40% of the year-over-year rise in headline inflation in key advanced and emerging economies (Exhibit 2).
Emerging Markets
Deglobalization and higher energy prices combined with supply chain constraints have raised headline inflation in most AEs and EMs (SUERF Policy Note, No. 211, December 2020). It is notable that upward price pressure was already mounting before the pandemic.
From 1995 to 2015, globalization of supply chains benefitted consumers as lower prices of imported goods kept CPI inflation subdued (BIS Papers No. 100, December 2018; Kenneth Rogoff, Economic Review, 2003). Since 2016, however, the deglobalization of supply chains, or the introduction of new tariffs and other trade barriers, has proved to be inflationary through higher labor inputs costs.
In October 2021, headline inflation rose to 6.2% in the USA, 4.4% in Canada, 4.5% in Germany, 4.2% in the UK, and an average of 9.1% in EMs, the fastest pace of annual CPI growth since 1995. Yet even excluding food and energy products, core prices were well above inflation targets in several advanced and emerging economies.
If supply chain disruptions were the driving force, then China, Japan, Switzerland, Malaysia, Thailand, and the UAE should also be affected in the same way as the USA, Canada, and other countries, which is not the case. Inflation rates in Switzerland, Japan, China, Malaysia, and UAE are below 2%. Unlike most advanced and emerging economies in Europe and Latin America, emerging Asian economies have seen a comparatively subdued rise in core inflation, and the pass-through from producer to consumer prices has been limited, with generally well-anchored inflation expectations.
Conclusion
The outlook for inflation is subject to much uncertainty as the pandemic has led to supply bottlenecks and a rapid increase in shipping costs. There is much uncertainty on the evolution of energy prices in 2022 and 2023. The most re- cent oil and natural gas futures contracts point to a modest decline of prices in 2022 and 2023. In contrast, in this note we assume energy prices to remain flat. Moreover, there is much uncertainty on when clogged shipping networks will be resolved.
Expanding the shipping capacity requires investment in ships and ports which will take several months to bring online. In the USA and Canada, there are a number of specific problems including a massive labor shortage in the logistics sector, as well as a shortage of labor to unload ships and drive trucks. Recent surveys in the USA and Canada suggest that average hourly earnings in 2022 are likely to be stronger than previous surveys, as labor shortages may persist next year. Longer periods of higher inflation from supply shortages could raise inflation expectations if central banks and governments fail to give clear signals on the path and tools of monetary policy.
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