What is Driving Inflation Numbers?!
Hello Friends. A warm welcome to new readers and subscribers! I am glad you are here
Inflation is out of target for a lot of central banks. Our local (South Africa) inflation rate showed up at 6.5% for May 2022, being the latest reading, which is above the 6% upper bracket target.
It is safe to say the numbers are out of control, and the global common thread in this inflation battle has been the hike of interest rates, which, although, has the effect of incentivising saving and ‘punishing’ borrowing resulting in less money chasing goods and services, and reducing investor expenditure (capital markets react negatively to hiked rates, and under the wealth effect ; when investors feel less wealthy because of unrealised losses on the markets, they spend less) could come short at driving down the inflation numbers. (See the data below of Central Bank activity).
Today at a glance:
A deep dive to what is driving the bigger portion of inflation numbers.
Curiosity is a reader - supported publication. Consider being a free subscriber to receive new posts
To get a better understanding of the inflation numbers and reach down to the key contributing factors (which have been debated about for long now), it is important to differentiate between the inflation surge being driven by the demand side or supply side of global socioeconomics, another very debatable differentiation.
Personally, and what many commentators share (somewhat of an antithesis to central bank policy implementation), it looks like the supply side causing inflation. Here is why I think so:
It all boils down to the commodities that are the most basic and important units or ‘building blocks’ of all goods and services (brent crude oil, gasoline, diesel, natural gas – energy commodities…corn, soybeans, wheat, edible oils - food commodities and fertilizers - a mineral commodity ) which the supply of has been affected by geo-political, and political events causing tension amongst state nations. (See the data below of the prices of different commodities from different starting points)
It becomes key to look further and identify the reasons why commodity prices are soaring, as the data above is showing
Some of the crucial reasons identifiable are:
Key commodities lost beween Russia and Ukraine
Russia and Ukraine combined, contribute an extensive share of global commodities supply across energy, metals and minerals, and food commodities (see the graph above). The war has impaired the supply of all these commodities, driving up prices across energy, food, and services products
11 countries restricting exports of food commodities
According to a report published by the United States Department of Agriculture; by 5 April 2022, 11 countries had implemented export bans of their flagship commodities due to fears of impaired supply: Including Russia, Belarus, Hungary, Serbia, Turkey, North Macedonia, and Egypt, for commodities ranging from wheat, wheat flour, barley, rye corn and oilseeds, to lentils and pasta. Some countries have been flirted out of these bans by global organisations like the United Nations , but the impact on food prices around the globe had already been absorbed in.
Supply chain distributions
It is no secret, and widely accepted that COVID-19 has discharged supply chains, and that energy prices have made it difficult for institutions to move goods across the globe, affecting supply and ultimately driving up prices.
All these three factors boil down to one common thread – deglobalisation led by friction amongst state nations, of which responsibility to lies with our country leaders, which is the most underlying cause behind the commodity numbers driving inflation.
The friction does not help in a world where it is evident that an energy crisis exists…extracting and disseminating energy across the globe is expensive, hence inflation numbers have soared to record highs for many countries.
... we have an energy (nutritional energy and industrial energy) crisis, a precarious situation, fueled further by friction rid nations, hence I strongly believe that fighting inflation through demand destruction through interest rate hikes, is only tackling the tip of the inflation iceberg.
We have a bigger problem that the current solutions from our policies do not acknowledge.
In the short run, demand destruction could help fight inflation, but without dealing with and acknowledging the underlying problem driving a bigger portion of inflation, it seems like our pockets will continue to burn a lot.
The previous month, on a radio interview with DYR I put through that the debate on the exact factors causing inflation is regressive to narrowly focus on, and shifted the conversation to ‘What can we learn from inflation.’
Having written about what I believe is driving inflation, I still maintain that a better picture of the inflation talk frames along, the lessons we should learn from inflation.
Feel free to listen to the audio interview from the previous month.
Thanks for reading curiosity, if you found this edition insightful, feel free to share it so more people read Curiosity.
Talk to you soon! Stay Curious
-Kusa Nkosi