Signs point to the global inflation storm about to cool down. Observers say that if they continue to raise interest rates strongly, the world economy may fall into recession.
According to Bloomberg, the US Federal Reserve (FED) once said that inflation – fueled by pandemic-related congestion – was only temporary. But they changed their mind after prices continued to soar at a record rate.
The Fed has raised interest rates twice this year and said it will continue to raise interest rates to curb inflation.
However, some economists still think the price shock will pass soon, once supply bottlenecks ease and energy costs stabilize.
Risk of economic recession
Some economists warn that central banks could make a big mistake by raising interest rates too aggressively, even as price pressures show signs of peaking.
The Fed stated that the speed of raising interest rates will allow the economy to “land safely”. But according to observers, excessive tightening of financial conditions could push economies into recession.
In 2011, the European Central Bank (ECB) raised interest rates and quickly reversed policy at the end of the year. The Bank of Japan raised interest rates in 2006, and had to cut them again in 2008.
Congested supply chains have prompted retailers to stock up on goods to meet demand. However, consumers are increasingly reluctant to spend because of rising interest rates. That can cause the goods to become redundant and drop in price.
For businesses in the S&P consumer indexes, with a combined market capitalization of about $1 billion, inventory values rose by $44.8 billion, or 26%, according to Bloomberg data.
Economists at Morgan Stanley warn that the risk of excess inventory is growing, especially in sectors like consumer staples and technology.
In addition, China’s economic growth deceleration due to strict anti-epidemic measures may put pressure on global demand. The country of 1.4 billion people is a big customer of commodities ranging from industrial metals, agricultural products to energy. Declining demand will affect prices.
According to calculations by Bloomberg Economics, if China’s industrial output falls by 1 percentage point, global oil prices will drop by 5 percentage points.
Since March, China has locked down a series of major cities to control the most severe wave of the Covid-19 epidemic in two years. Up to now, the country has relaxed its strict anti-epidemic measures. However, observers say that the economic impact is still lingering, especially when Beijing is still determined to pursue the Zero-Covid strategy.
The weakening economic and employment outlook has made many Chinese consumers hesitant to spend, and companies more cautious in new investment and expansion.
China is the largest buyer of iron ore in the world. In 2020, the country accounts for 40% of global copper demand, 30% for nickel, zinc and tin.
Risk of deflation
Japan is an outstanding example of economic stagnation caused by deflation. The country has made many policy mistakes by expecting inflation to return. Now, it is still too early to conclude whether the current situation is different or not.
Consumer prices have hit the Bank of Japan’s (BOJ) 2% target due to higher energy prices. However, the income of workers did not increase significantly. This frustrates consumers.
The BOJ remains committed to stimulus measures based on the view that the current level of inflation is temporary.
“I think the world will quickly move from record inflation to deflation,” said Takahide Kiuchi, an economist at Nomura Research Institute (based in Tokyo).
“Inflation is falling at the cost of an economic downturn. The price trend will be determined by the potential global growth rate, which is weakening due to the pandemic and the situation in Ukraine,” the expert said.
“Commodity prices will fall. They remain at all-time highs, but are unlikely to continue moving up,” said Priyanka Kishore at Oxford Economics.
She forecasts that by mid-2023, food and energy commodity prices will fall by 10-15% from a year earlier, helping to cool global inflation.
@ Zing News