Macro monthly Oct 2021 | Supply shortages stoking inflation | Article – HSBC VisionGo
- Activity is being held back by supply issues ranging from shipping costs to the availability of labour…
- …which continue to add to inflationary pressures…
- …forcing policymakers to strike a balance between containing inflation and supporting the recovery
As the pandemic continues to rumble on in much of the world, many of the same issues remain for the global economy. High shipping costs, elevated commodity prices and a shortage of labour are all posing headaches: holding back activity and pushing up prices.
The uncertain road to recovery
This creates a question in terms of the next stage of the economic recovery – will we see a more drawn-out recovery in activity where it takes time for supply to meet rampant demand? Or will we see higher inflation – driven by the demand and supply shocks – squeeze real incomes, causing the recovery to stall? On top of this, as we enter winter in the northern hemisphere, COVID-19 numbers could surge, too, providing another downside risk to growth, particularly if restrictions are re-imposed – however unpopular that may prove with many citizens.
Demand remains robust in advanced economies
Strong wage growth is spurring demand in developed economies
In large parts of Asia-Pacific, pandemic-related restrictions have taken their toll on growth, but for all of the slowdown in economic data in the advanced economies in recent months there is scant evidence that this is due to waning demand. Instead, as economies re-open, consumers spurred by buoyant labour markets, strong wage growth and high levels of household savings are running out of things to buy: be it food, fuel or cars (see Charts 1 and 2 for the US).
Inflation pressures are elevated
Expectations of sustained inflation are growing
These constraints are pushing up prices – and inflation remains a key topic for financial markets. Although US core CPI was in line with expectations in September, rising rental inflation is acting as a counterbalance to any waning of the “transitory” narrative that had dominated markets for much of 2021 (see Charts 3 and 4). In both August and September, US monthly CPI rose by less than seasonal norms, but increases are broadening out. With growing price pressures for firms there is an expectation that inflation could remain high more sustainably, prompting higher pay rises and leading the Federal Reserve into earlier rate rises.
Many emerging markets have lifted interest rates
Elsewhere in the world, notably in Europe where economies continue to re-open, price pressures continue to build, spurred further by high energy prices (see Chart 5). In much of the emerging world, central banks are tightening more aggressively to deal with elevated inflation prints as energy and food prices push higher.
The dilemma for policymakers
Policymakers need to balance containing inflation with supporting the recovery
All of this is keeping policymakers in a bind. Higher rates may be warranted by strong demand and high inflation, but any premature move may nip any recovery in the bud, or intensify any slowdown. Some developed market central banks – the Norges Bank and the Reserve Bank of New Zealand – have already hiked rates – the question is whether any others will follow, and how soon.