Shortages skew inflation risks to the upside

Inflation is set to stay higher for longer than we previously envisaged due to surging energy prices and goods shortages. The boost from energy will go into reverse next year due to base effects and lower oil and gas prices. Goods shortages are worsening and will persist for some time given lean inventories, pandemic-related shutdowns in Asia, and strong demand for imported goods. These pressures should start to ease next year. But there is a risk that the shortages trigger a more persistent pick-up in price pressures, particularly when labour is also in short supply. Staff shortages are most pronounced in the US and intensifying rapidly in the UK and Canada. In all, while we expect inflation to ease back to below target in the next couple of years in Japan and Europe, it will settle at higher rates in the US.
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Global Economics Focus

Will labour shortages spur productivity gains?

One possible upside of the current labour market shortages in developed economies is that they could push firms towards expanding output by raising investment and productivity instead of relying on cheap labour. However, any gains in productivity may not materialise quickly enough to prevent central banks from reacting to the pick-up in wage growth. In view of the wider interest, we have also made this Global Economics Focus available to clients of our Long Run Service.

2 December 2021

Global Economics Update

PMIs show some signs of supply shortages easing

November’s manufacturing PMIs suggest that global industrial production has continued to expand, albeit at a slower pace than earlier this year. There are tentative signs that supply disruptions may be easing, but from a very strained starting point, and virus developments may cause a renewed deterioration soon.

1 December 2021

Global Economics Update

Renewed restrictions: inflationary or disinflationary?

If Omicron turns out to be malign enough to prompt tighter restrictions, we suspect that the net result would initially be for inflation to be lower than otherwise. But by worsening product and potentially labour shortages, restrictions on household activity could end up keeping inflation above targets for longer.

1 December 2021

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Global Economics Chart Book

Global recovery slowing down a gear

There have been growing signs of a slowdown in the pace of the global recovery in recent months. World industrial production fell in July and retail sales declined in almost all major economies, while the business surveys suggest that activity softened again in August. To some extent, this moderation in growth has been benign, reflecting a natural normalisation of activity as the effects of past stimulus fade and output approaches or exceeds pre-virus levels. However, high frequency data on activities such as restaurant dining show that consumer caution has returned in some places as virus cases have risen again. What’s more, the surveys offer evidence that widespread shortages of goods and labour are limiting growth. With the notable exception of the euro-zone, we think that the rapid phase of the recovery is already in the rear-view mirror for the world’s major economies.

20 September 2021

Global Economics Chart Book

Peak global growth narrative lacks nuance

Slowdowns in China and the US should not be taken as evidence that the global recovery is stalling. Admittedly, it is not just some high-profile data from the US and China that have weakened recently. Recoveries in retail sales, industrial output, and trade more broadly have generally flattened off, while the PMIs have dipped too. But some commentators have cast these developments in too negative a light. Growth in the US is normalising after unprecedented stimulus and China’s economy is coming back down to earth from above-trend levels. Meanwhile, many survey indicators have merely edged down from record levels. And while the softer production and sales of goods can partly be pinned on shortages of materials and parts, they also reflect a benign reversion of consumer spending away from goods towards services as economies re-open. Most of the world is behind the US and China in re-opening and so is yet to reap the full benefits of lifting restrictions. While weaker growth in China will exert an arithmetic drag on global growth in Q3 and Q4, we expect a pick-up in growth in the rest of the world in the second half of the year.

12 August 2021

Global Economic Outlook

Pandemic rebound peaks but recovery story still intact

The initial post-pandemic resurgence is nearing its zenith, but strong policy support and limited private sector debt should allow most economies to grow at a healthy pace over the next two years. The US and China were among the fastest to recover to their pre-virus paths or even beyond, so it is no surprise that they are slowing first, whereas growth in the euro-zone and Japan has yet to peak. The spreading Delta variant is a risk, but mainly to Emerging Markets where vaccination is less advanced. As goods shortages ease, activity normalises, and commodity prices fall, most economies should see inflation drop back towards central bank targets and policy tightening will generally be more limited or come later than markets expect. Even in the US, where inflation is a bigger threat, we do not expect interest rate hikes until the first half of 2023.

28 July 2021
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