The next global pandemic: inflation
It had to happen. While Covid has destroyed our way of life, few have predicted how global plant, refinery and mine closures could impact prices. As countries recover, the rise in oil prices, which has doubled from November to today, topping the $ 70 / bbl level, is pushing up prices in all sectors.
Indian policymakers can learn from the slowly returning Western economies to normal. In the United States, the consumer price index in June posted a 5.4% increase, the largest year-over-year increase since 2008.
Economists classify inflation as being on the supply side – when the world’s factories can’t meet demand – or on the demand side – when too much money drives out limited supply. The world appears to be fighting inflation on both fronts.
And it’s not just oil. When the homework formula, so prevalent in the service industry, took hold, a harsh truth emerged: To make physical goods, we need people to go to work, produce them, and ship them to. across the global supply chain. When the pandemic hit, many semiconductor manufacturers closed their doors. Automakers have sluggish their factories, forcing the few remaining microchip makers to switch production capacity to make more PCs and phones as demand for Zoom-based technologies increases.
With the return of production of automobiles and other big-ticket items, demand is too high for a limited supply of chips. Intel and other manufacturers have announced new factories, but they won’t start ramping up supply for months. Glenn O’Donnell, vice president and chief research officer at Forrester Research, said in his blog: “As demand will remain high and supply will remain limited, we expect this shortage to last until 2022 and in 2023. “
The result has been a sharp increase in semiconductor prices. The chips are used in products ranging from IOT devices to satellites. Refrigerator prices in the United States have increased by 50% and used car prices by 40% from pre-pandemic levels. A car shortage has prompted Hertz, Avis and other chains around the world to increase rental prices 200 to 300 percent in some markets. To make matters worse, central banks are flooding markets with money, and governments are borrowing and spending trillions of dollars to fight downturns. No one knows when to apply the brakes. The 10-year US Treasury yield is 1.32%. The return on consumer savings accounts is practically nil.
There are also dark stories on the demand side. In North America, where most homes are built of wood, government cash assistance for a pandemic has prompted homeowners to engage in DIY projects. Lumber prices increased even when sawmills began to close. Before the pandemic, lumber was selling for around $ 350 / 1,000 board feet. In May, the price on the futures market jumped to $ 1,250, almost four times more for the same amount of wood. This has had a ripple effect in the vast housing industry. In the Dallas subway, new home prices have skyrocketed, pushing up existing home prices. The frenzy of buyers has set in. Realtors have reported that buyers have started bidding on already high list prices for $ 75,000 without even inspecting the home. Sellers had to deal with more than 50 offers, most of them above asking price; everything was done on the day of the call for tenders.
This is what textbook inflation looks like and it isn’t pretty.
Of the 10 most populous countries, life has not returned to normal in five (India, Indonesia, Pakistan, Brazil and Bangladesh). As these economies recover, demand will put further pressure on already scarce global supplies. We are facing a pandemic of high prices for years to come.
The author is Managing Director, Rao Advisors LLC, Bedford, USA