Inflation already at the door in parts of global economy

How this could take shape in post-pandemic recovery will depend on factors like surge in demand, policy response

People in a store in Sao Paulo, Brazil, early this month. The country's inflation rate jumped to 5.2 per cent last month, about double what it was six months earlier. With one of the world's worst Covid-19 outbreaks, Brazil has spent more on pandemic relief than almost all other emerging economies, and all that spending weakened the currency and fuelled inflation fears. PHOTO: EPA-EFE

NEW YORK • The big question in financial markets is whether the post-pandemic recovery will bring a burst of inflation. In some corners of the world economy, it has already arrived.

In commodities like soya beans or copper, industries like shipping and countries such as Brazil, prices have been climbing rapidly - for reasons directly tied to the disruptions of Covid-19, the policy response to it or the surge in demand that comes with hopes of recovery.

None of this is enough to settle the great inflation debate one way or the other.

Hawks say that pockets of inflation today will turn into across-the-board price increases tomorrow, with stimulus providing the fuel. Sceptics see price rises as largely driven by temporary spurts or bottlenecks - and point out that similar alarm bells were sounded after the 2008 crash, when inflation never showed up.

The following are some of the areas already seeing a surge in prices - and how they connect to the broader inflation picture.

METALS

Government efforts to lift economies out of the pandemic slump have involved spending on infrastructure projects and financial support for households, who spent some of the cash on electronic gear. Both are contributing to roaring demand for metals that has pushed prices steadily higher.

Copper has been rising for almost a year, a rally that accelerated in February before falling back this month. Iron ore and nickel also hit multi-year highs, and steel prices more than doubled in the past six months.

All these increases add to the costs for manufacturers. That is one reason China posted higher-than-expected producer price numbers last week.

Speaking to Bloomberg Television, the global head of commodities research at Goldman Sachs Jeff Currie said the run-up in metals is the "revenge of the old economy" - with pandemic stimulus driving purchases of consumer durables - and also shows the demand for new-economy green initiatives, with some US$16 trillion (S$21.5 trillion) in capital spending planned over the next decade.

SEMICONDUCTORS

Semiconductors are a key component of many in-demand items during the year of lockdowns and work from home, from laptops and television sets to webcams. Prices of some varieties, like memory chips, have climbed this year.

The surge in demand has run into a supply crunch that has been exacerbated by geopolitics.

The dominant players in the US$400 billion industry are Taiwan and South Korea, and their exports are increasingly being caught in a United States-China crossfire, with sanctions on Chinese producers giving another lift to global prices.

The upshot has been frustration and higher costs for buyers. US electric carmaker Tesla had to slow production lines. German car parts maker Continental said the shortage will likely cost the company about €200 million (S$321 million).

FOOD

The post-pandemic rebound is one driver of higher food prices all over the world. In the US, chicken legs are rising as big-order restaurants come back online. China's domestic recovery is spurring greater demand for soya beans, whose prices have climbed more than 60 per cent over the past year.

There are plenty of other causes as well, including the common ones of drought and disease.

In China, an outbreak of African swine fever threatens a repeat of last year when the virus killed tens of millions of pigs in Asia.

Food costs are especially important for policymakers in emerging markets, where they make up a disproportionately larger share of spending and more households are at risk of hunger. In the Philippines, where food costs have pushed inflation close to 5 per cent, the government has imposed price caps.

ENERGY

Alongside stronger demand in a recovery that is likely to see more travel, oil has also been hit by a supply squeeze after producers decided to cap production. That has helped drive crude towards US$70 a barrel, a level it has not reached in almost two years.

That is especially threatening for emerging nations that rely on imported energy, like Turkey and India. They risk being pushed into bigger trade and budget deficits that can scare off investors and weaken currencies.

Higher fuel costs hurt drivers everywhere and reach into almost every corner of the economy. In Brazil and Mexico, for example, the cost of liquefied petroleum gas canisters used for cooking in poorer households - richer ones are more likely to be connected to the natural gas grid - has jumped this year.

HOUSING

Low interest rates and the spread of work-from-home are driving property market booms in many countries, especially the US and Britain.

So far, there generally have not been comparable increases in rental costs - but that could follow.

In the New York Fed's latest consumer survey, rents were expected to soar 9 per cent by next February.

Windfall gains for home owners and steeper prices for renters are a recipe for widening inequality.

In China, the top banking regulator has worried aloud about the risk of a bubble in property markets, pointing to a "very dangerous" trend towards speculative buying and warning that tighter policy may be needed to rein in lending.

SHIPPING

A shortage of containers is behind the jump in shipping prices over recent months, threatening to add a new layer of costs for imported goods.

Governments and businesses have been scrambling to find fixes.

State-owned Indian Railways transferred empty boxes to inland depots from seaports at no charge, while a German supermarket chain briefly examined the option of trucking imports from China.

German chemical giant BASF, which raised prices for clients by 7 per cent in the fourth quarter, says it has been struggling with the container crunch as well as higher precious metal prices.

All kinds of US retailers have been reporting logistical troubles that threaten to push prices up in their stores. Shipping costs are not captured in US import prices, making it harder to figure out how they will be passed on to consumers.

BRAZIL

Brazil's inflation rate jumped to 5.2 per cent last month, about double what it was six months earlier, and it is already forcing policymakers to change course.

The country has spent more on pandemic relief than almost all other emerging economies - rivalling the US by running up a budget deficit of almost 14 per cent of gross domestic product last year.

It also has one of the world's worst Covid-19 outbreaks and is a vaccination laggard - so the measures will likely have to extend into this year.

All that spending has weakened the currency and fuelled inflation fears. Just a few weeks ago, the central bank was talking about keeping interest rates at a record-low 2 per cent for longer. Now it is expected to surge this week.

While Brazil is an outlier in key respects, that is essentially the chain of events that policymakers and investors worry about in other emerging economies too - and maybe even some developed ones.

BLOOMBERG

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A version of this article appeared in the print edition of The Straits Times on March 15, 2021, with the headline Inflation already at the door in parts of global economy. Subscribe