The coronavirus-hit inflation data will rear its ugly head eventually
The coronavirus-led demand slump has pushed the global economy into recessionary mode. Excess spare capacity is keeping inflation muted, until the world fully reopens. Of course, demand has also fallen across the board, resulting in lower inflation.
Average inflation in advanced economies dropped about 1.3 percentage points since the end of 2019, to 0.4% (year-over-year) as of April 2020, the International Monetary Fund (IMF) said in its latest economic outlook report. In emerging market economies, inflation fell 1.2 percentage points to 4.2%, the report said. “Inflation projections have generally been revised downward, with larger cuts typically in 2020 and for advanced economies. This generally reflects a combination of weaker activity and lower commodity prices, although in some cases partially offset by the effect of exchange rate depreciation on import prices,” the IMF said.
However, some economists warn of an eventual inflation surge as business activity begins to pick up. Further, this rise in inflation could be higher than anticipated. “The virus continues to create data quality problems—we know that inflation data contains large numbers of made-up prices. Academic research suggests that while still very low, inflation is probably higher than is being reported in the data,” Paul Donovan, chief investment officer, UBS AG said in a recent podcast. “Globalization was deflationary and its reversal will be inflationary,” said Andrew Pease, global head of investment strategy at Russell Investments. “On the supply side, it would be inflationary from higher input costs, less cheap foreign labour and rising tariffs and protectionism. On the demand side, central banks likely would take a lax approach to rising inflation and governments would see higher inflation as a way of reducing debt,” he added.
The massive monetary easing by central banks globally is also expected to be inflationary over time. Furthermore, this particular recession has been paired with a collapse in crude oil prices.
Brent crude prices have fallen from this year’s peak of $69 per barrel and are currently at $42 per barrel. But the outlook for crude oil prices is likely to improve as businesses reopen. Oil prices and inflation are often seen as being correlated. Since oil is a major input for activities such as transportation and manufacturing, the rise in crude oil prices could well affect product prices.
“Economies are starting to open up and the oil shock is already starting to abate. Efforts by developed economies to bring some manufacturing back within their borders are also likely to lead to higher prices as countries seek to reduce their dependence on others,” said economists at RCB Global Asset Management in their latest global outlook.
Of course, in the near term, prices will likely remain suppressed due to the continued pressures on demand, and the resultant spare capacity. But, over time, investors should brace for higher inflation.