Why we should expect fluctuations in global inflation dynamics

The long-awaited era of easy money seems to be coming. In the past few weeks, the Bank of England has raised interest rates, and the Fed said it will speed up the reduction of its asset purchase plan and raise interest rates up to three times in the coming year.All of this is based on the idea “Temporary” inflation It is becoming more durable, moving from commodities and durable goods to areas such as wages and services.

Much of the debate about growth, inflation, and the stock market is about long-term shifts that we may or may not enter. But what if the only constant in the next few years is volatility? What if the seemingly entrenched inflation dynamics start to fluctuate? I think you can argue that this is for many reasons.

First, the chain reaction of the pandemic created a different inflationary environment from the 1970s, which was the last period of long-term inflation in the United States. Covid has caused a series of asynchronous recessions and recovery worldwide. The United States is “hot,” but China, which has been struggling to reduce the real estate and debt bubble, has cooled down.These two extreme facts The global economy is decoupling, Not only in terms of trade and capital flows, but also in terms of growth, making it more difficult to predict how inflationary pressures will play out.

This is just one of the many factors behind the “inflation” trend called by investment research provider TS Lombard, where multiple supply and demand factors push and pull each other in unexpected ways. For example, although the world has adapted to the sudden “high Covid” demand for all digital products and pandemic-specific commodities such as medical equipment, personal protective equipment, and household items, there may still be some post-Covid-19 supply service industries that have been impacted. There was almost no reason to invest in the past two years, so idle capacity was insufficient.

This has led to wage pressures.In the United States, the service industry accounts for a major part of the economy, and companies expect wage costs to rise 4% in 2022According to the Think Tank Conference Committee, as the salary budget reaches its highest level in 14 years. All of this has intergenerational complexity. “In particular, the wage growth of young workers has soared, compressing the typical premium offered to more experienced employees-in turn, they are looking for new opportunities in the hot job market.”

At the same time, companies may fall into a round of price commodification, which will also depress profit margins. Although the demand for goods has been great in the past few years, we may soon see manufacturers and retailers have overstocks because retailers prevent over-purchasing. A December research report by Deutsche Bank stated that “retailers over-ordered before busy holidays” and “manufacturers produce and hold far more inventory than before the epidemic”. According to the Bank for International Settlements, “Mechanical effects on CPI As supply chain misalignment and “preventive hoarding behavior” weaken, it is likely to lead to deflation.

This will inevitably lead to commodity deflation, even if there is inflation in the service industry. The areas where spending has grown the fastest in the past year are outdoor entertainment, restaurant dining, movie theaters and theaters.But this can also change quickly according to the trajectory of Covid-19 variants, just like those of us who have been cancelled holiday plan See.

All of this has contributed to what the Bank for International Settlements recently called the “bullwhip effect”, that is, efforts to address the immediate inflation problem will produce complex and delayed ripples that further distort prices. The shift from efficiency to flexibility in the supply chain driven by geopolitics will benefit everything from localized production to new sovereign-backed digital currencies, and will further hinder economists’ attempts to use data from the past half century to control inflation. Modeling.

Technology is the last wildcard. Artificial intelligence means it can do more things that humans can do; 5G and the Internet of Things are improving business efficiency. Both are deflationary. But this is only part of the story. For example, remote work reduces the price of commercial real estate, but raises the price of home. Robot installations (increased by 12% in the US this year) are good for companies trying to keep prices down, but bad for the unemployed facing soaring fuel and food costs.

The results of it?I think we might see from Central banker Try to figure out the direction of the next development. Coupled with the historical problems of debt and asset bubbles caused by decades of falling interest rates and unprecedented quantitative easing, you will face one of the most complex environments for monetary policy. If anyone should raise their salary, it is those who are trying to figure out where inflation is heading.

rana.foroohar@ft.com

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