• Interest, supply chain issues and deglobalization processes
• Declining economic growth with rising prices means stagflation
In March of this year, fuel, rent and groceries were the biggest price drivers in the US. Also US Treasury Secretary Janet Yellen admitted that she was wrong when she assessed inflation as unproblematic a year ago. “I think I was wrong at the time about how inflation was going,” she told CNN. High energy prices and ongoing supply chain problems have shaken the economy and its underestimated.
Curbing inflation is therefore currently the central issue. In the general debate in the Bundestag, Chancellor Olaf Scholz also warned against “permanent developments with inflation rates that are too high” and called for “concerted action” against the high inflation. The inflationary pressure must be sustainably reduced.
Vitaly Katsenelson, CEO and CIO of Investment Management Associates, explains why he thinks inflation is a long time coming in an op-ed published in the Financial Times and MarketWatch. He even assumes that the current inflation figures in the USA are too low and considers the significantly higher, non-adjusted inflation figures for imports and exports (between 12 and 18 percent) to be more realistic.
The factors responsible for the high inflation and the shock to the US economy and the world economy remained for a long time: Persistently high energy and food prices as well as rising interest rates, supply chain problems and deglobalization processes.
Rising prices driven by pandemic and war
The decline in investment in the fossil fuel sector has been accelerated by the pandemic and Russia’s war against Ukraine. As a result of the sanctions against Russia, the world market could lose almost 10 percent of the total volume (8 million barrels). However, it is questionable whether large oil importers such as China and India will fully support the sanctions. Even if individual countries circumvent the sanctions, Russian oil and gas production would lack outside know-how, and Russian exports would inevitably decline in the longer term.
In comparison to crude oil, transporting natural gas via tankers or pipelines is much more difficult. Europe, especially Germany, is massively dependent on Russian gas. According to Katsenelson, even if the countries want to free themselves from their dependency within the next few years, this will be difficult in practice and oil and gas prices will remain at a high level. In the USA, too, the production of gas and oil will have to increase.
The high food prices can also be partly attributed to the Ukraine war. Because almost 15 percent of the wheat is produced in Russia and the Ukraine, and the fertilizer industry also obtains important raw materials for potash and nitrogen fertilizers from the two countries. Thus, an export stop of gas and potash has a direct impact on food production in all areas, from cereals to fruit and vegetable cultivation to meat production. Food inflation is disproportionately affecting poorer countries and the poor in wealthier countries, as they will have to spend an ever-increasing proportion of their income on food in the future. For comparison: in the USA, consumers spend an average of 8.6 percent of their income on groceries, in Ukraine the average is currently 38 percent – and the trend is rising.
Supply chain issues will continue to preoccupy the economy
Higher interest rates make goods bought on credit more expensive, and cheap credit could be a thing of the past. According to Vitaliy Katsenelson, the consumer is put under pressure from all sides.
Renewed lockdowns in China would also intensify and prolong the supply chain problems resulting from the pandemic. With its zero-COVID policy, China has one of the lowest per capita infection and death rates in the world, but is still far from normalization due to partially insufficiently effective local vaccines and low immunity within the population.
The pandemic and the Ukraine war would also have accelerated deglobalization and revealed the fragility of global supply systems and the much-touted just-in-time principle. The global trading system based on the assumption that trading partners did not wage wars with each other – this assumption can no longer hold.
Editorial office finanzen.net
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