High global inflation is expected to moderate over the medium term
The combination of robust global demand growth and pandemic-related supply constraints for goods and services has led to a significant rise in consumer prices. In fact, global inflation, as measured by the Organization for Economic Co-operation and Development (OECD) Consumer Price Index (CPI), rose 5.8% year-on-year (y/y). a), a rate not seen for decades. It is important to note that rapid inflation is occurring in most advanced economies, with the exception of Japan (see charts I and II).
Against this backdrop, investors and economists are wondering whether the world is on the cusp of a new, long-running inflationary cycle. The debate is already leading to a reversal in the political orientations of several central banks. Policy makers are moving from accommodating to “normalizing” or even tightening up. It has even led to a more “hawkish” stance from the US Federal Reserve and the European Central Bank.
Chart I: OECD CPI inflation (%, y/y, November 2021)
CPI inflation OECD
Sources: Haver, OECD, QNB analysis
At the time of writing, global inflationary concerns are particularly salient, as the recovery remains strong and supply bottlenecks are pervasive in key markets. However, in our view, while prices should remain high over the next few months, inflation should nevertheless moderate over the medium term. We highlight three main reasons to support our analysis.
First, while prices across the board have risen, a significant part of the pick-up in headline inflation numbers over the past few months has come from the energy complex, driven by rising prices.
However, in the absence of any new shocks, the room for a continued acceleration in energy prices over the medium term is limited. Oil and gas prices have already fully recovered from the excessively low prices of 2020. Moreover, the faster than expected recovery in global demand already seems to be reflected in current energy prices.
Additionally, we believe continued positive economic momentum is already factored into the plans of OPEC+ and US producers, who are expected to ramp up production to meet additional global demand. Therefore, barring any major unexpected geopolitical events, we do not expect any significant surprises on the demand or supply side of energy markets this year. As a result, energy prices should be more stable, helping to moderate global inflation.
Chart II: Breakdown of inflation in major economies (%, y/y, November 2021)
Breakdown of inflation in major economies
Sources: Haver, OECD, QNB analysis
Second, there are already signs that parts of the supply chain constraints are easing. The improvement, particularly strong in Southeast Asia, should ease some of the disruption to global supply chains as factories reopen and production resumes. High-frequency data from Emerging Asia has indicated a strong recovery in activity over the past few months, indicating significant relief from supply issues related to COVID-19 and the Delta variant.
This is a key development, as “Factory Asia”, the supply chain complex around manufacturing hubs in Northeast and Southeast Asia, forms the central node of global trade. Importantly, Omicron has proven to be less disruptive to supply chains so far. Also, when it comes to shipping constraints, there have been some positive developments. Prices for dry bulk transport have already fallen by almost 60%, while air freight rates have fallen by 20% and freight rates for container transport have stabilized in recent weeks.
Third, there are still significant spare capacities in the global economy. In several countries, total industrial capacity utilization and the employment-to-population ratio are still below their pre-pandemic levels. This suggests that globally there is still room for additional manufacturing demand and job growth before the economy begins to overheat to the point of creating permanent inflationary pressures.
Overall, global inflation is expected to moderate in 2022, driven by stabilizing energy prices, easing supply chain disruptions and the existence of economic slack in the future. global scale.